What impact does the Budgets have on the Stock Market?
May 3, 2020
The Budget impacts the economy, the interest rate and the stock markets. How the finance minister spends and invests money affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices.
Fiscal deficit is the gap between the government’s total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure.
Direct Taxes are the taxes that are levied on the income of individuals or organizations. Income tax, corporate tax, inheritance tax are some instances of direct taxation.
Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc.
Corporate tax is the tax paid by companies or firms on the incomes they earn.
Indirect taxes are those paid by consumers when they buy goods and services. These include excise and customs duties.
Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter.
Excise duty is a levy paid by the manufacturer on items manufactured within the country. Usually, these charges are passed on to the consumer.
The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore affecting economic growth.
The capital budget is different from the revenue budget as its components are of a long-term nature. The capital budget consists of capital receipts and payments.
Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits.
Capital payments are capital expenditure on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.
Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce profit margins of companies, thus slowing down production and growth.
Non-plan expenditure like subsidies and defense also affect the economy as limited government resources are used for non-productive purposes.
