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Wednesday, February 25, 2015

How to position yourself for the Budget – a guest post

The Finance Minister will present Modi government’s first full budget on Saturday, Feb 28. Will it be a ‘dream’ budget, or a ‘realistic’ budget or a ‘populist’ Budget? Speculation is rife, and all kinds of rumours are floating around – as is often the case during budget week.

The Railway budget will be presented on Thursday, Feb 26 – followed by the Economic Survey on Feb 27. Those may provide an indication of what may be in store on Saturday.

In this month’s guest post, Nishit argues against a ‘populist’ budget. A ‘realistic’ budget will incorporate some tough measures that may disappoint the market. A ‘dream’ budget will send the stock market soaring to new heights. Either way, there will be opportunities to make money.

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The Union Budget will be presented on Saturday (Feb 28) and the stock market will be kept open on budget day. All eyes are on the Union Budget and let us find out why the Budget is such an important part of the annual economic calendar.

The Budget has two main implications: 1) the Government presents its report card of the past year in Financial terms. It gives the Actual Achievements vs. those projected in the previous Budget. The key figure which everyone looks at is the fiscal deficit number.

2) The more important implication is that the Government outlines its policies and plans for the next year. It outlines what reforms the Government intends to undertake, what would be the subsidies announced, etc.

Usually, the Union Budget becomes more significant when a new Government takes over or after a significant election when a Government comes with a fresh mandate from the people. Often, reforms if any will be attempted in the first three annual budgets. After that the Government goes into election mode and tends to announce populist schemes.

After all, sound economics alone do not win elections. The much touted MNREGA scheme was one of the key reasons why the UPA won in 2009. Now, the present budget in 2015 and the next in 2106 will be two opportunities for the Government to demonstrate their commitment to reform measures. After 2017, with the elections just 2 years away, they may not tinker with policies.

The Modi Government came riding on a lot of hope for reforms. Now, 9 months have passed and there have been no major reforms per se. The first Interim Budget was said to be too short a time for the Government to announce anything new.

The market has seen a rally since August 2013 when Modi was first declared as a BJP candidate for the post of Prime Minister. After his election, Nifty was at 7200. The last 20% rise has been in hope of reforms.

If the Budget is good and reform-oriented, expect Nifty to test 9200-9500. If the Budget is below expectations then a 10-15% correction would be logical.

Either way, for an investor there will be opportunities - book profits at higher levels or accumulate quality stocks at lower levels.

The significance of the Budget at times is overplayed and it is only a milestone on a journey which has many milestones. We all know the euphoria of the 1997 Chidambaram dream budget which sent the markets soaring but later on correction set in.

If euphoria does set in, then it is always a good opportunity to book profits.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan. You can reach him at nish.stockid@gmail.com)

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