A look at how markets have moved before and after Budget

The Budget comes in the backdrop of an economy firing on all cylinders, and equity benchmarks Sensex and Nifty at record highs. At the same time, there are concerns that valuations are out of whack with fundamentals.

Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget on July 23, the first after the 2024 elections.

The full Budget 2024 comes in the backdrop of an economy firing on all cylinders, and equity benchmarks Sensex and Nifty at record highs. At the same time, there are concerns that valuations are out of whack with fundamentals.

Some defend the premium valuations saying they reflect India's potential. They point to advancements in infrastructure, defense, and manufacturing, which have bolstered India’s economic foundation.

According to Siddharth Khemka, head of research at Motilal Oswal, Nifty is currently trading at 21x 1-year forward P/E, which is marginally above its 10-year average of 20x. India currently enjoys excellent macroeconomic fundamentals with strong GDP growth, a sound fiscal position, a stable currency, and healthy corporate earnings.

Raj Vyas, Vice President - Research, Teji Mandi said valuations look a bit stretched but over a longer term horizon, they are not unreasonable. India has much better growth potential compared to its global peers. Hence, for investors with a long-term approach, it seems like a good time to invest.

But there are others who advise caution, likening the current market to riding a tiger and urging investors to be prepared for potential significant downturns.

Let’s take a quick look at how the Indian markets have performed post-election or after interim Budgets. Here are some data points showing market performance on the Budget day, one month prior, and one month after the Budget.

The last such instance was on July 5, 2019, marking the first Budget to be presented after election results. Prior to that, it was on July 10, 2014, then July 6, 2009, and July 8, 2004, when the Budgets were presented after election results. In 2019 and 2014, the NDA government was formed and presented the Budget, while in 2009 and 2004, it was the UPA government.

Interestingly, historically, the markets have consistently experienced sharp declines around Budget days. In 2009, there was a notable drop of over 5 percent on the Budget day itself. However, in the month leading up to the Budget, there have generally been positive returns, with 2009 showing the most significant gains at 15 percent. Post-Budget, declines have been noted in 2019 and 2004, while 2014 and 2009 saw positive returns.

With the Union Budget approaching, analysts, experts, and lobbyists have outlined their priorities for government spending. Unlike in previous Budgets, the government will be working with abundant resources, thanks to a substantial dividend from the RBI, allowing for increased spending and potential deficit reduction.

However, the challenge lies in optimising these funds to maximise economic growth amid coalition pressures. Key options include reducing fiscal deficit while maintaining capital expenditure, increasing investments in both infrastructure and consumption, or a balanced approach across these areas.

The government's ability to manage these dynamics will impact economic conditions, particularly in encouraging private sector investment through favourable borrowing costs and stimulating consumption, especially in rural areas. Balancing these priorities will be crucial for sustaining economic momentum while addressing political alliances, ensuring both short-term goals and long-term strategies are met effectively.