Do Government Policies Impact Stock Markets?

There are very many variables that impact stock prices. However, the government fiscal policy which is announced in the annual budget every year and the monetary policy announced by the Reserve Bank of India have a special significance not only on overall economic growth and stability but also on the equity prices. Geyatee Deshpande analyses the connection and impact of both these policies on the equity prices

- Geyatee Deshpande

The Union Budget is always considered a major event that decides the market direction at least in the short to medium term. Considering that the budget is an annual event, every stakeholder has to take cognizance of it and use it to frame investment decisions for the year ahead. The announcements made during the budget are, after all, connected to the fiscal policy and discuss at length how much money is going to be spent to support the demand side of the economy. A fiscal policy is essential to keep the economic growth engine on track. In fact, a fiscal policy has the dual objective of maintaining steady economic growth as well as social justice by taxing the rich and subsidising the poor.

Fiscal Policy

The fiscal policy thus is very important from the stock market point of view. Taxation is something that is decided in the fiscal policy and subsidies are announced to provide support to any particular sector that is struggling to survive. On most occasions, import duties and export duties are tinkered with in the fiscal policy in order to support a particular sector and also to strike a balance between exports and imports. Basically, the fiscal policy aims to increase aggregate demand in the country.

Aggregate demand is a derivative of the consumption level in the country, government spending, investments, and net exports and imports.

The formula below explains how to calculate the aggregate demand: AD = C+G+I+ (X-M) Aggregate Demand = Consumption + Government Spending + Investments + (Exports – Imports).