IMPACT OF BT]I)GET O

INTRODUCTION

*Ashulp;h_Yeqng

YNeeti Asrawql

The -process

of globalization is creating a new r,r'orid. The benefits and cosls of intemationalportfolio diversiflrcation need to be considered by anyone holding a financial portfolio. similarly,the firm that is considering raising ne"v resouroes needs to address the requirements of the globalmarketplace' Assimilation of public information b-v stock markets indieates the semi-strong lormof efficiency of capital markets" An event stucly is one of tn" ,""rr"iqr;;t;;-ur**r. rhe impact ofpublic informaticn on stock markels- It invoives comparing the reiums on stock indices andirrdividual shares fbr the pre-event and post-event period. A significant ehange in returns and riskfor the post event period sigrtifies that the event had an impact on the returns. 'fhis paper dealsr.r,ith an event study-using budget as an evenl window. It compares the retums on CNX nilty indexprior to and subsequent to the budget to assess the impact of the event, the budget pr.rpcsals on thestock markets" The study covers four budgets beginning from 2002-2003 to 2.005-2aa6.This rvasthe period 'vhen the Indian stock markets fbceel tne utacf Monciay crash and also the change of thegovernmenf at the centre' The finciings of the study indicate that the evenf has a significant impacion the stock market and it influences the returns for the post event perioo. However, the studyrecommends ihat the event it self should not hre diluted to re.duce the voiatility oitt" inarketsCOi\CEPT OF EFFICIBNT STOCK rVI.,{RKBTAs India moves fcrward with newsetof econr:mic poiicies it changes the rcle of'privarb capital infhe developtnent of the economy (verma etal, 2000j. one of the reasons aitributed to ihe lailure ofthe public enterprises is the improper utilisaticn of scarce econcmie resources. As fhe privaresector cornes io play the domirrant role_-in

.the cieveloSrment of the economyl capirai marketsbecome the major source of capital rnobilisation. capitai resources are scarce and if they arc notallocated efficiently tiien it will. Result in irnproper ailocaiion of resources. Therefcre, it is imperative that the stock markeisbecorne efficient' 'rhe efficiency of the stoc!: markets is of two ty?es, the cper.ational efficiencyand inforrnational efficiencl'(Mishkin, 1998). operaiional efficiency indieates the speed withwhich the transactions are executed in the stock maikets. As far as operational efficiency of lndianstock markets is concemed it has progressiveiy increased with online trading aJ aematerialisationof securities' Informational efficiency inrlicates the spee,J wirh.vhich the information isassimiiated in the stock markefs" Thus, abscrrption and reflection of information in stock prices is asine-qua-non for the efficiency of stock markets. [n an efficient marke[rh" p*nt maxirnising

1Il

{Rational investors are always looking for undervalued and over"valued securities. They deteet these

qryes of securities and in the process the prices of the securities reflect inrinsie worth of the

securities. Therefbre, in an efhcient market it is impossible to earn abnormal profits and as such

technical analysis is refuted in a weak form efficient market"

Semi-strong form of marketIn a semi-strong form of market all the public information is reflected in the prices of the securities

of the company. It implies that eurrentprices of stocks not only reflect all informational content ofhistorical prices but also reflect all publicly available information (Mayo, 2000). Public

information includes not only past prices, but also data reported in a company's f,tnancial

statements (annual reports, ineome statements, Frlings with the Security and Exchange Board oflndia, earnings and dividend announcements, announced merger plans, the financial situation ofcompany's competitors, expectations regarding macroeconomic lactors such as inflation,unemploirrnent. In fact, the public information does not even have to be of a strictly financialnature. For example, for the analysis of pharmaceutical

Companies, the relevant public information may include the current state of research in pain-relieving drugs. In order formarkets to be serri-strong, there can be no time lags as the latest news is disseminated to thepublic.The market may over-react or under-react to news, but as long as it reacts instantly andcontinuousiy in a series of unbiased movements around the equilibrium price, the semi- stronghlpothesis is supported" Market efficiency is directly or implicitly tested any time a study isperformed to identify stoek price reactions to certain events such as, stock splits (Ccpeland L979),large block transaetions (Holthausen etal, 1987), (Kraus etal, 1972), earnings announcements(Bamber, 1987), repurchase tender offers (Lakonishok etal, 1990), other public announcements(Kim etal, 1991). dividend declaration (Baja; and Vijh 1990, 1995). Thus public information andits assimilation play an importaat role in assessing the eft-rciency of the stock markets.

Types of public information: Public: informaiion is generally ciassified into two caregories,the micro information and the n:racro inforniation. The micro information may be company specificinformaticn like declaration of dividencis, splining of shares, a large block Cea[ on the stock!flarket, a new acquisition in a far off East Afncan couirtry or receiving a large order" Theinforrnation may be afieci.ing all the companies in the industry like government scheme to set up aspecial economic zone, reduction of customs duty and a special tax incentive ior the industry. Itn-ray be couniry specifie or global inforrnation. It includes anncuncerrrent of industrial policy,anrrual budgets, credit policy announcement by Reserve Bank of India, open rnarket operations byReserve Bank of [ndia, announcernent by other countries regarding removal of impon restri-ctionsand international oil priees. In a semi-strong efficierrt market all this public information isassimilated by the rnarket and reflecreci in the prices of securities.Budget: Budget contains important public information, which may have an impact on the stockmarket. In India, the budgei is an annuai linancial statemeni containing the estimated receipts andexpenditure of the government of India, which has to be laid before parliament in respect of everyfinancial year, which runs fr.:m 1" April to 31't March under article 112 of the constitution. Allrevenues form part of the eonsolidated fund anC in addition a contingency fund is created whichworks on an imprest system" The government also receives amount on account of provident fundand savings schemes, which are credited to public accounts. A budget is classified into revenuebuclget and capital budget, rvhich is based on the nature of the.expenses. Overall, through budgetsthe government is able to implement its fiscal policy, '[axation is one of thc irnportant tools offiscal pclicy. The finance bili actually deterrnines the rates of both the direct and indirect taxesaffecting the individuals as well as all forms of commercial enterprises. Thus, budget is oneIrlacro-econolnic phenomenon, which influences each and every oompany.

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OBJECTIVE :

The objective of the study,is io hnd out whether the annual budgets, whiehr are considered asevents in this study have an impact on the stoek markets or not.METHODOLOGYStudy: The study is exploratory in nature. It seeks to determine the impact of budgets on stockmarkets.Sample: CNX Nifty is selected to reflect the sentiments of the overall market. The reasons forselecting CNX Nifty are:

l. it is a well-diversified index consisting of fifty stocks, which represent twenty-three sectorsof the economy.2. It aceounts for 58% of the traded value of all the stocks traded on national stock exchange[NSE) during the ldrst six months.3. Stocks constituted in CNX Nifty represent 60%o of the total market capitaiisation as onMarch3 l, 2005.The date on which the budget was presented in parliament is taken as the event window.Tools:For Data Collection:Inlormation about the budget dates is collected from the website of the Ministry of finance,Government of India.CNX Nifty figures are taken from the NSE's website.For Data Analysis:The day on which the budget has been presented is called as event day and is symbolised by 0.The undisturbed period comprises of the returns from - 60 days to -i day anC the disturbedperiod comprises of +1 to -l-60 days.Therefore,pr : Expected returns during the undisiurbed periodor = Standard deviation of returns in the undisfurbcd periodptz - Expected retums during the disturbed period62

: Standard deviation of returns in the disturbed periodThe hypotheses to be tesred are'dq I,tr=lt:Ht. ltvltzFor testing the hypoihesis of mean refurns, t test has beer' used wirh 95% levei of significance.A considerable change in rnean in the disturbed period will indicate that the event has an impact onstock market.LimitationsOne of the limitations of the study is the deterrnination of the disturbed and undisturbed period.Different researchers have selected different durations to study the impact of the events.RESULTS AND DISCTISSIONResultsThere are, four budgets covered in the study the details of which are given in tablo 1 in appendix l.Mr Jaswant Singh presented an interim budget on February 3,2A04 due to the ensuing generalelections and as such Cid not contain any policy decisions of the goveirnment. Therefcrre, it has notbeen taken into consideration in ihis study. l"he results of the analysis are presente<l in Table 1.2 inappendix 1.

Discussion20C2-2003 BudgetAn analysis of the resuits indicate that the mean returns have turned negative in the post eventneriod for the year 20A2-2A$. Ho$'ever, ihe deviation of the returns has not changed much. The

t

I hypothesis is rejected in this year. Some of the highlights of the trudget proposals which have a

Jio"t or indirect linkage with the capital markets were

l. The budgei oocument stated that it was for consolidating, widening and deepening the refornr

process.

Z. ihi, *ur a budget to further promote partnership with the states for a better tomorrow for the

people of India.

3. it stressed on power and infrastructure development in terms of roads, ports and civil aviation.

4. An infrastructure equity fund of Rs"1000 erore was to be set up to help in providing equity

investment for infrastructure development. Specific reforms in the financial sector and capital

rnarkets involved replacing the old Public Debt Act with Government Securities Act and foreign

institutional iw'estors (FIIs) portfolio investments not to be sucject to the sectoral limits for foreign

direct investment exoept in specified sectors"

5. It also proposed reduction of l6Yo special excise duty on a number of items. It introduced a

number of structural reforms for non-performing assets of banks. Thus, this budget was considered

as providing great impetus to the reform process.

2003- 2004 BudgetTh.- mean returns were negative for both the disturbed period as well as the undisturbed period.

The variation in returns was also significant flor the two periods. The hypothesis was accepted forthis year.Highlights of ths budget were:

i. The budget provided ihat from April 1, 2003 dividends were tax-free in the hands of the

sharehoiders but it levied a 12.5?/o dividend distribution tax on domestic companies.

2. Tax holiday was extended to research and development companies established up to March 31,

2004.3. ir4ajcr cut in customs dufy on textile machinery was provided

sector.4. Incorne tax concessiorrs to pharmaceuticals, biotechnology

brought at par.5. Tlie other reforms included in this budget weie ihe increase in foreign direct inveslment in banking

companies to be ra-ised to 74x/o.

6. The earirer limit of \0o/" of voting rights in banks irrespective of the share holding rras alsorerrroved.

7. The rate of interest on public provident fund and small savings schemes was reduced by onepercentage point and 5%o surcharge in case of corporate taKes was reduced ta 2"5o/c

2004-2005 BudgetDuring this period the mean returns tumed positive as gompared to negative retums for theundisturbed period. The hypothesis was rejected for this year" This budget was presented in theback drop of the common minimum programme. It was being perceived that rvith pressure fromLeft, the Congress with its allies would backtrack or slow the reform process. Thus, the trust ofthis budget was on a number of social programmes, which focussed on poverty reduction,providing employment and education to rural poor. The food for work programne was to belaunched. There were smaller amendments in direct taxes but no radical changes in the directtaxes. Rationalisation of customs duties w"as continued in this budget io bring it at par withinternational standards.2005-2006 BuclgetThe mean retums in this year tumed negative for the disturbeci period and the hypothesis wasrejected. This was the second budget presented by Mr. P Chidambaram" The growth rate .ilas

estimated to be 69% with the manufacturing sector expected to grow by 8.9%. This budgetprovidei flexibiiity to Resele Barrk of india to prescribe prudential norrils by removing the lower

to encourage the growth of textile

and information technology were

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j,-'cEIg

ff

and upper bounds j:jlt st'atutory liquidity ralio (sLRi" There were amendmenrs ro the ReserveBank of India Acf 1934 to t*-ou" the limits of cash r"r*** ratio (cRR) to faciliiere more flexibleconduct of monetary policy ancl also to enable RBI to lend or borrow securities by way of repo,reverse repo or otherwise' The two significant proposals in relation to capital market were that FiIswere to be permitted to submit appropriate collateral, when kading in derivatives on the domesticmarket and the term 'securities' was amended to include mortgage backed debt.CONCLUSIONIt can be seen that except for the year 20a3-2004 the hypothesis that mean returns fbr theundisturbed and disturbed period are same is rejected" fhis indicates that the event budget has animpact on the stock markets and the information about the budget is assimilated in the market. Italso indicates that the volatiiity of the market is inereased due to budgets. Thus, it can be seen thatail the budgets have directly or indirectly strong eonnotations ior the sioek markets. The

nilJt"* in the stoek markets, thus, do have a sifrrificant impact on the macro econom-y of the

There are several studies across the developed stoek markets, which tested the impact of budgetsanc tax refbrms and.amendment legislations- cutler (igsSflound that tax legislations,s differentialtreatment of old and new eapital was reflectect in equity.or*r. Lang &shickettord (2000) foundthat reduced capitai gains tax vzas inverselv related io ilrria"na yieids, cutler, p'therb & summers(1988) concluded that neither the information about the macro economic developments nor majorworld events fully explain the movements in the s&P 500 index. Nageshwara Rao tlgg.')studiedthe impact of budget and Reserv'e Bank of india's credit policy on stock index. I{e used thebudget date and date of announcement of credit policy u, "rr"rrt

window. He covered the budget of1992 to 1995 and Reserve Bank of India creiit polir*, announcement flom oetober 1991 tooctober 1994' The findings indicated that budgeiu *"r" associated with increased volatilit), andthe crecit policy announcements did nct have unf inflr-nee on the siock prices.Generally' it is observed that the period of tr,vo rncnths is s*fficient to a;gest *,* inro..nution. Thus,the bucgets do increase the voiatility of the market. However, this does not mean that thegovernment should not come out witir an anncuncement cf number "ip"ii"V decisions in thebudget.

References:Agrawal, s" (2001). [nvestor's Guide to stock Markets" New Delhi : Bharat, pp. i6.Economic Review, pp" 78"

Fii'iJ:,,7i),)0,:,iri;iloi'rj"i::'and Summers- Lawerence (re88). whar Moves Stock prices. Journat af

Mayo, H. B. (2000). lnvestments. Orlancio: Dryden, pp. 179.Rao' Nageshwara s"v' D"* ( rggT)- Impact of Macroeconomic Events on Stcck price Behaviour,lvlanagement & Acco unting R es errch- Jo urnal, Jr., i,"_S;;;: p;

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Appendix ITabie -t " I

a

a

#gG

Date ofevent

Feb 2820a2

July 8.2044

Details of the undisturbed and Disturbed period for the EventlJndisturtred period fristurbed p".lod-1]

December 30, 2C01 March l.2AA2 n200:-2004

to Febnrarv 27 2002 Aprrl29.2002December 30, 2002 March l" 2003toF 2003 ri\29,2C032tj04-

2005Aprii 9, 20047,2004

to June June 9, 2004 toi

I

Presented by

YashwantSinha

__L August 1,2004

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to February 27,2005December j0, 2004 March 1,2005 to

Ap.ril29,2AA5

Table I.2' Results of the analysis

Budget Mean Std Dev. t-value

0utcYear Undistur

bedPeriod

Disturbed

Period

Undist-urbedPeriod

Disturbed

Feriod2002-2003

0.3 -0.15 .0112

"0114 I "996 Rejected24|f-

zAU-4.7 -.JJ .008 "0124 1.089 Acce

Dted2404-20a5

-0.41 0.13 .0323

"0t2 -0.98s Rejected

2W6-0.20 .012 .0i l 0.739 Rejec

ted