It is seldom that a Union Budget speech in India does not set off manic ups and downs in the stock and bond markets, causing investors to swing between euphoria and despair. This interim budget, the NDA government’s last one before the general elections, seems to have managed this feat with smooth sailing for the markets.

The BSE Sensex, beginning the day at 36,311 points witnessed only minor gyrations as the acting Finance Minister read out his speech. It had soared nearly 300 points higher by the time he wound up. Nor was there a big selloff in bonds, with the yield on the benchmark 10-year government security seeing only a mild uptick from 7.28 per cent to 7.30 per cent.

Get all the live market updates here

What cheered the market?

There were three sets of Budget announcements that cheered the markets. One, that the NDA managed to rein in its fiscal deficit for FY19 at 3.4 per cent of GDP, just 10 basis points over its stated target of 3.3 per cent, came as a pleasant surprise to both stock and bond investors. Markets were braced for a slippage of 20-40 basis points with the deficit numbers through the past year consistently overshooting targets. For the stock market, a contained deficit means global rating agencies taking a benign view of India. For the bond markets, it means less bloat in the market borrowings of the government that crowd out private borrowers. While the gross market borrowings for FY20 have been pegged 11 per cent higher, the market expects net market borrowings to be reined in.

Two, slowing consumption was one of the bugbears dogging India Inc in the last few months, with both micro indicators such as auto sales and macro ones such as GDP data warning of consumers tightening their purse strings. Here, the Budget proposals to grant a tax rebate to all income-earners with less than Rs 5 lakh annual income (who make up over 90 per cent of the Indian population), the launch of a broad-brush income support scheme for 12 crore farmers and the assured pension scheme for unorganised sector workers, promise to put cash directly in the hands of consumers, boosting feel-good. This approach of direct giveaways to consumers contrasts with previous NDA budgets which focussed on long-term rural welfare and infrastructure projects. 

Consumption stocks may be over-reacting to the ‘rural spending stimulus’ from the credit of Rs 6,000 a year to small/marginal farmers . But tax breaks to more affluent urban consumers and pension benefits of Rs 36,000 a year to unorganised workers have potential to lift demand for small-ticket consumer goods in the medium term. The fact that these new giveaways are in addition to the existing ones on fertilisers, food, LPG, small savings and so on, is a positive too.

Finally, the budget seems to have granted material tax relief to the beleaguered real estate sector and cobbled together extra-budgetary sources to continue with sizeable allocations to flagship infra schemes such as MNREGA, Gram Sadak Yojana, Krishi Sinchai Yojana and the affordable housing scheme, which should keep public infrastructure building going, which should augur well for core sectors such as cement, steel and mining.

Also read: Interim Budget 2019-20 as it happened

However, it would be best not to read too much into the Day One stock or bond market reactions to the Union Budget, as there could be many a devil lurking in the fine print.

This year, with elections looming, there’s further uncertainty about whether the proposals for FY20 will be implemented in their current form. The market is likely to quickly put the budget behind it and turn its attention to the all-important elections in the coming days.

Related Topics
comment COMMENT NOW