Saturdays are holidays for the Bombay Stock Exchange, which remains shut for the weekend, but next Saturday when finance minister Arun Jaitley rises in Parliament to present the Narendra Modi government’s first full-year budget, the stock market will be open for trading. And for viewers of the televised budget speech, there will be the annual ritual of watching the Sensex’s worm-like graphs go up, down or sideways with the utterance of every other sentence by the FM. Later, serious-looking experts and TV anchors will try to interpret with gravitas what the stock market makes of Jaitley’s budget and why the Sensex moved the way it did. The question is whether it really matters.
When it comes to the budget, the Sensex it would seem is a cynic with a hint of fatalism. A review of the past 11 budgets (from former FM P Chidambaram’s first for the UPA-I in July 2004 to Jaitley’s first in July 2014) shows that the Sensex, which is a weighted index of 30 big and most traded Indian stocks, reacts with more gusto to what traders perceive as negative in the government’s annual balance sheet making exercise than to the positives. On seven of those 11 occasions, the Sensex greeted the event with a fall and the four times that it rose the increase was, at best, modest: the biggest fall of the Sensex on a budget day since 2004 was nearly 6% but the biggest gain was slightly more than 2%. On the day it fell nearly 6% — July 6, 2009 — it was the then FM Pranab Mukherjee’s first budget for the UPA-II. The stock market had expected him to announce bold big-bang reforms because in its second avatar, the UPA had come to power without the support of the Left parties. Mukherjee may not have obliged but as it happened, just after Mukherjee’s budget, during 2009-10, India’s GDP grew at 8.6% and, in the following year, 2010-11, it clocked 8.9%. The markets had got it wrong.
On the rare occasions that the Sensex did go up on a budget day, the rise seemed reluctant. In February 2005, Chidambaram delivered a budget that everyone considers a landmark: he announced a slew of social sector schemes designed to boost rural incomes and spending at the bottom of the pyramid, thereby creating a multiplier effect for demand and growth. The Sensex rose, but by just 2.2%. For the record, in 2005-06, India’s GDP grew 9.5%; in the following year by 9.6% and in the subsequent year by 9.3%.
Dalal Street’s analysts, of whom there is an abundance, will explain why the Sensex behaves the way it does on budget day by telling you that the stock market often does a very curious thing before the budget: it ‘discounts’ what it expects the budget to announce. Not being a market analyst, to me there’s a word that seems to describe that better: speculation. Or, in this season of revelations about information leaks could it be that the stock market’s punters somehow get to know things before the rest of us do?
The thing is that stock trading when the FM gets up to read the budget can be an opportunity that is tailor-made for traders to punt for profit. And how the Sensex behaves on that day, in real time and in pace with what is read out in Parliament affects nobody more than the bulls and the bears of Dalal Street, never mind whether they’ve already ‘discounted’ what they expect the budget proposals to be.
For Jaitley, presenting a budget that delivers on the high expectations that the people have from the Modi government is what will matter. He has to keep the government’s deficit in check and yet spend enough to trigger growth; and he has to earn enough to be able to do that. With an economy still sluggish and private investors skittish that is no easy task. Narendra Modi stormed to power on the promise of development, growth and progress. Nothing will demonstrate whether his government can deliver on those better than next Saturday’s budget. That and not what happens during happy hours on Dalal Street should be on Jaitley’s mind.