Wait for the budget fine print before making investment decisions

Many retail investors are worried about the market as off late the equity markets have become highly volatile on the eve of budget. Now the fear is more for two reasons – firstly, the market is close to life-time high; secondly, the ruling party has lost miserably in the recent Delhi election. Hence, many are worried that the government may usher in several social reforms at the cost of economic reforms. Therefore, a lot of investors fear that the markets may crack in a big way on the day of budget.

First of all, the budget is misunderstood by many retail investors in both micro and macro perspectives. It is quite sad to know that as and when the finance minister announces some increases in allocation to agricultural sector or educational sectors during the course of his budget speech, immediately some stocks in these sectors move up substantially. Increasing the allocations for such sectors is always a necessity because of inflation and population growth. Actually the kind of allocations made may not be relevant to the actual business of listed companies in those sectors. Many times such proposals mean mere few rupees increase per farmer or per student, but stocks move up even 5% to 10% for the news flows!

In terms of macro perspectives, the budget delivers only in two areas – balance the revenues and expenditures through fiscal measures; and also express some proposals ("only intents"), many of which mostly fall outside the fiscal ambit of the government. The past experiences amply prove that mere expression of too many "intents" – especially outside the fiscal domain - does not guarantee their delivery. Passive budgets have also been followed by a lot of actions on various economic fronts due to economic compulsions.

It is well understood by the politicians in the past that the memory of voters is too short. Many times in the past, the welfare schemes were announced just a few months before the elections. This government has little more than 4 years to rule, so it is too early to initiate welfare schemes now. Moreover, this government has no choice to focus on the social reforms – the tax collections are growing in single digit as against strong double-digit projections in the last budget. Country's exports are de-growing (in January it fell 11.2% yoy) and manufacturing sector is limping (grown at just 1.2% during the first nine months of current fiscal). So the government has no choice to ignore the economic reforms. The retail investors would be better off, if they wait for the fine print of complete budget to make decisions instead of reacting to the budget speech instantaneously.