India's Union Budget and Equity Market ReturnsIndia's Union Budget and Equity Market Returns

The 2024 Union budget for the new term of the coalition government will likely be presented in the third or fourth week of July. As usual, there will be frenzied punditry leading up to the event around the likely announcements, specifically around direct and indirect taxes, the government’s planned expenditure, sectors benefiting or losing out on favoured regulations, and their impact on equity markets. This article is our periodic reminder about why these things do not matter.

We analysed the major announcements in the last 24 Union Budgets from 2000 to 2023, whether they were largely positive, negative, or just neutral for equity investors, and the corresponding returns around those Union Budgets. The results on how budget announcements impact equity investors’ short- and medium-term returns are unclear.

Consider four examples:

In the 2003 Union Budget, the NDA government prioritised reducing the deficit by introducing new taxes, including state-level VAT and service tax. The CNX500, the broad market index of the top 500 companies in India, ended the day up 0.5%. A month later, the index was down 6%. A year later, the market had doubled.

On July 8, 2004, in the first budget presentation of the incoming UPA I government, Finance Minister P. Chidambaram announced the abolishment of the Long-Term Capital Gain tax on equities and the introduction of Securities Transaction Tax (STT). All gains from holding stocks and equity mutual funds longer than a year would be exempt from tax. The CNX500 fell 3.2% that day.

Nearly 14 years later, on February 1, 2018, NDA Finance Minister Arun Jaitley re-introduced a 10% Long-Term Capital Gain Tax on gains over INR 1 Lakh annually. The CNX500 ended the day barely unchanged, 0.1% down. The index was down 4.6% a month later, roughly where it ended a year later, first rising, then falling dramatically before partially recovering.

In the 2015-16 budget, Finance Minister Arun Jaitley announced a four-year roadmap to reduce the corporate tax rate to 25%. Markets ended the day marginally up 0.4%. A month later, the market was down 3.6%; a year later, it was down 18.7%.

The table below shows the median, best, and worst returns for periods leading up to budget day and for periods after.

For all the hype around budgets and their aftermath, the median returns for equity markets around budgets are typical of any other day, week, month, or year.

Negative median one-month and one-week prior returns indicate watchful behaviour leading up to the announcement. The returns one year prior and one year after are symmetrical.

The table below shows the percentage instances of negative and positive returns in the same time frames before and after budget announcements.

Market behaviour one week before and one week after budgets are interesting mirror-images of each other as uncertainty rising up to budget day, then receding after the event. However, returns one month later indicate a coin toss on whether you’ll be up or down if you invest at close on the day before the budget.

The odds of positive returns on the one-year time frames are consistent with the overall equity market behaviour, i.e. positive in 2-3 of any 4 years.

The table summarises the 24 elections since 2000, key announcements made, whether net positive, negative, or neutral for investors, and the returns around those elections.

Here’s an abridged version of the table summarising equity returns around India’s Union Budgets.

The same table but with the major announcements in each budget. Scroll to the right in the table below to see returns around budget dates.

Click here to view the detailed table in an expanded view.

Union Budgets, like so many other (non)events, evoke much sound and fury in financial media, especially TV channels, which cover every subtle or exaggerated quote breathlessly.

Consequently, as investors, we latch on to them, trying to parse their likely impact, reducing or increasing equity exposure, and under or over-weighting sectors. If the election results drama should have taught us anything, it is that all-or-nothing points of view about investing tend to be way off the mark. After the noise subsides, Indian markets do what they must, i.e. head as per the long-term trend in earnings growth in the context of valuations.

And let’s say you do get it wrong and happen to invest at the very top of the market in the near term. We’ve done the numbers and examined the difference in long-term return between the luckiest (who invest at the bottom every year) and the unluckiest (who invest at the top every year).

Even the absolute worst investor in terms of timing investments does reasonably well, provided they stay the course.

Anyone with an investing horizon of 10+ years should not be fretting about what will likely be announced in the July 2024 budget. There is no better alternative to staying invested and continuing to add, especially on declines.

Further Reading:

What if you were the unluckiest investor in India?

Election and Volatility: What now for investors?

You can't plan for everything. But you can plan to respond better.