THE EVOLUTION OF STOCK MARKET AND ITS IMPACT ON
INDIAN ECONOMY
ECONOMICS RESEARCH PAPER FOR THE INTERNAL CONTINUOUS ASSESSMENT (ICA)
SEMESTER 2
Submitted by: Vidhisha Agrawal
Course: B.A.L.L.B (hons.) 2021-26
SAP ID: 81012100265
ROLL NO: B 223
Submitted to: Professor Shashikant Mundhe
DECLARATION
I make a statement that the research work is originally done by me and the content
in it is not given anywhere. The references of used content is mentioned and given
appreciation. I state that research paper is made by me and the work done is my
own except where it is mentioned in the text itself, and the work done in this paper
is not been submitted by any other degree holder or any university.
Vidhisha Agrawal
ACKNOWLEDGEMENT
I am sincerely thankful to my college, SVKM NMIMS SCHOOL OF LAW to provide me with
the opportunity to write a research paper for ECONOMICS.
I am also thankful to Prof. Shashikant Mundhe for guiding me in every stage of this research
paper. Without her support, it would have been really difficult for me to prepare the research
paper so meaningful and interesting.
I would also express my gratitude to the librarian of SVKM NMIMS SCHOOL OF LAW,
NAVI MUMBAI, and my seniors who have helped me during the course of this research paper
in different ways.
Through this research paper, I have gained a lot of information about the principle of absolute
liability and its importance in our country. I hope that this research paper provides a better
understanding of the rule and also clears out the contrast between strict and absolute liability.
THANK YOU
TABLE OF CONTENT
Sr. No. Particulars Page No.
1. Abstract 5
2. Introduction 6
3. Research question 7
4. Literature review 7
5. Research objective 7
6. Analysis 8
7. Conclusion 12
8. References 13
ABSTRACT
In the field of economics, one of the most long-running debates is the empirical question of
whether the growth of the stock market influences or comes from increasing economic activity.
The purpose of this study is to discover whether or not there is a causal connection between the
expansion of the stock market and the expansion of the economy in India. The analysis, which
makes use of cointegration and causality tests, reveals a well-defined long-run equilibrium
relationship between stock market development indices and economic growth in India from June
1991 to June 2013. The time period covered by the analysis is from June 1991 to June 2013. The
empirical findings demonstrate that there is a causal relationship in both directions between
market capitalization and economic growth over both the long and short terms. Additionally, the
empirical findings demonstrate that there is a unidirectional causal relationship between turnover
ratio and economic growth. In general, indices of the development of India's stock market, such
as market capitalization and turnover ratio, tend to be advantageous to the country's overall
economic expansion..
INTRODUCTION
A stock market is a gathering of buyers and sellers of stocks (also known as shares), which
reflect ownership claims on enterprises; these may include securities listed on a public stock
exchange as well as private stock. Other names for a stock market include an equity market or a
share market. The latter refers to the sale of stock in privately held enterprises to individual
investors through online platforms that facilitate equity crowdfunding. On stock exchanges,
trading takes place not only for ordinary stock shares but also for other asset kinds including
corporate bonds and convertible bonds.
Numerous economists believe that the stock market plays a role in the evolution of a nation's
economy. This is due to the fact that the stock market serves as a venue for businesses to garner
capital for the launch of new projects or the expansion of existing ones. According to Osho
(2014), the stock market serves an important purpose as an economic institution because it
increases the efficiency of capital formation and allocation. This is accomplished by enabling
businesses and governments to raise long-term capital in order to finance new projects or expand
their operations.i
Jecheche (2011), in support of the aforementioned thesis, asserts that the stock market enables
developing businesses to raise money at a reduced cost and that companies in countries with
developed stock markets are less reliant on bank funding, thereby reducing the risk of a credit
crisis. These two claims are supported by the belief that the stock market allows developing
businesses to raise money through the stock market. Even though the stock market is thought of
as a source of income, its influence on the expansion of the economy is not always taken into
account. According to Mark (2000), the stock market can be compared to a game played in a
casino or a game of chance. In addition, the stock market is an efficient tool that can be used to
raise cash and improve living standards. There is some validity to Keynes's claims.
There are many different ways that stocks can be categorised. Examining the nation in which the
company's headquarters are located is one approach. It is possible that companies like Nestlé and
Novartis, which have their headquarters in Switzerland, are considered to be a part of the Swiss
stock market. However, the shares of these companies can also be sold on exchanges located in
other countries, such as American depository receipts (ADRs) on stock markets located in the
United States. According to the Standard & Poor's Global Stock Markets Factbook, as of the
month of December 2010, India held the seventh spot in terms of market capitalization (up from
the eleventh spot in 2009), the tenth spot in terms of the total value traded on stock exchanges,
and the twenty-second spot in terms of the turnover ratio (2011). The rise in the market
capitalization of Indian stock exchanges over the course of time is evidence that an increasing
number of companies are making use of the trading platform provided by the stock market.
Around Rs. 68,430,493 million was the approximate value of India's market capitalisation at the
end of March 2011. The cash segment turnover of Indian stock exchanges increased by 43.3% in
2010, reaching Rs. 55,184.7 billion, compared to Rs. 38,525.8 billion in the previous year. Both
the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) contributed to a
turnover percentage of 99.9 percent when combined. The NSE was responsible for 74.9% of the
total cash market turnover, while the BSE was responsible for 24.9% of the overall revenue.
RESEARCH QUESTION
1. Does the stock market has an impact on the economy of the country?
2. What are the stock market and its regulations in India?
RESEARCH OBJECTIVE
1. To Study the Role of the Stock market in the Indian economy
2. To know the impact of the Stock Market on the Indian Economy
RESEARCH METHODOLOGY
This study will mostly rely on secondary sources for its data collection and analysis. The topic
was researched using a number of different books and articles. In addition to that, research
articles published in a variety of journals were used. An abstract concept was offered by the
study based on the data that was obtained from a large number of secondary sources written by a
variety of academics and historians. The impact of the stock market on the Indian economy is the
topic of this research paper, which draws its data from secondary sources such as journals,
magazines, books, and websites. The term for this field is "Conceptual Methodology."
ANALYSIS
The fascinating question of whether or not financial markets contribute to economic growth is
one that has sparked a significant number of empirical analyses throughout the years. In his most
important study, Pardy (1992) proposed that capital markets in developing countries have the
potential to more effectively allocate money and mobilise domestic savings. According to Spears
(1991), the activity of financial intermediation served as a stimulant for economic expansion in
the early stages of development. In a similar vein, Atje and Jovanic (1993) found that stock
markets have long-term effects on economic growth and that stock markets control economic
growth through a variety of channels. These channels include liquidity, risk diversification,
business acquisition, corporate governance, and savings mobilisation. In addition, Atje and
Jovanic found that stock markets have long-run effects on economic growth. Both Demirguc-
Kunt (1994) and Levine and Zervos (1996) assert that the stock market is beneficial to the
development of the economy. When the banking and financial sectors of the economy are
operating smoothly, the growth of the economy might receive a major boost from the activity of
the stock markets (Rousseau and Wachtel 2000, Beck and Levine, 2004).
Singh (1997), on the other hand, focused his study in the 1980s and 1990s on emerging nations
and the importance of stock markets in long-run economic growth. He concluded that long-term
economic progress in emerging countries is not dependent on the stock market.ii
According to Harris (1997), there is no substantial association between the stock market and
economic growth in 49 nations between 1980 and 1991. Boubakari and Jin (2010) recently
proposed a positive link between the stock market and economic growth for select nations with
liquid and active stock markets.iii For countries with tiny and less liquid stock markets, however,
the causality relationship is disputed. According to Okoye and Nwisienyi (2013), Nigeria's
capital market can stimulate growth, but it has not contributed much to the country's economic
growth.
It was worth highlighting in the linked literature that empirical evidence in the context of Indian
capital markets is still inconclusive and ambiguous. With India's rapid economic reforms and
incorporation into the global economy, capital markets have become increasingly important and
have drawn international attention, particularly from sound investors. The Indian stock market
has undergone significant fundamental institutional changes, resulting in significant reductions in
transaction costs as well as significant improvements in efficiency, transparency, and safety,
allowing stock exchanges to contribute significantly to the country's economic development.
Moreover, in the post-reforms period, economic expansion through technical advancements, and
product, and service innovation are predicted to create a significant demand for stock market
development. This research looks at the causal relationship between stock market development
and economic growth in India.
STOCK MARKET & REGULATIONS
The term "stock market" refers to public markets, either over-the-counter or on-exchange, that
are used for the issuance, purchase, and sale of stocks. The stock market is an exchange where
buyers and sellers of investable assets such as stocks and equities can conduct business. Stocks
and equities are both terms that refer to fractional ownership shares in a company. A well-
functioning stock market is essential to the advancement of the economy since it makes it
possible for businesses to easily get funds from members of the general public.
The Ministry of Finance, the Securities and Exchange Board of India, and the Reserve Bank of
India are the entities responsible for the governance and supervision of the Indian capital
markets. Regulation is carried out by the Department of Economic Affairs - Capital Markets
Division of the Ministry of Finance. It is the duty of this division to formulate laws that will
ensure the orderly growth and development of securities markets (including stock, debt, and
derivatives markets), as well as to protect the interests of investors.
India's stock market is regulated and overseen by the Securities and Exchange Board of India.
The SEBI Act of 1992iv established SEBI as an independent entity with the jurisdiction to audit
stock exchanges. The inspections focus on the market's operations, organizational structure, and
administrative control. SEBI laws apply to all financial intermediaries, whether domestic or
foreign, who are authorized by their respective regulators to trade in Indian securities markets.
Foreign portfolio investors must first register with DDPs to participate in the Indian securities
markets.
The New York Stock Exchange (NSE) is a participant in the securities market, hence it is
accountable for creating and enforcing the rules and regulations that govern the securities
market. These regulations and guidelines include everything from investor protection to member
registration to listing of securities to monitoring of transactions to member compliance with
SEBI and RBI legislation to transaction monitoring. Each of the NSE's trading sectors is subject
to its own unique set of rules and regulations. SEBI, being a regulated organisation, conducts
routine inspections of the NSE to verify compliance.
The Reserve Bank of India Act from 1934 serves as the legal framework for the organization's
governance. As part of its mission to strengthen Indian financial markets, the Reserve Bank of
India (RBI) is in charge of implementing monetary and credit policies, printing currency notes,
and serving as the government's banker, banking system regulator, manager of foreign exchange,
and regulator of payment and settlement systems, among other responsibilities. The Reserve
Bank of India (RBI) is responsible for the law that governs the various financial markets and
systems. The Foreign Exchange Management Act of 1999 is the primary legislation that oversees
the currency exchange markets.
IMPACT ON ECONOMIC DEVELOPMENT
International investors are interested in emerging markets, but they raise numerous crucial
problems for policymakers in developing countries: Do stock markets have an impact on general
economic growth, and if so, how? What is the role of stock exchanges and banks in promoting
economic growth? How might stock market growth aid underdeveloped countries?
Do the stock markets have any bearing on the expansion of the economy as a whole? Even while
there are some economists who consider the stock markets in developing nations to be "casinos"
with little impact on economic advancement, new evidence suggests that stock markets can
actually provide a considerable boost to economic development. The creation of liquidity in the
stock market can have an effect on overall economic activity. Because liquid stock markets
enable investors to buy an asset—equity—and then sell it quickly and cheaply if they need
access to their funds or want to change their portfolios, investment is less risky and more
enticing as a result of the existence of liquid stock markets. Additionally, companies have
unrestricted access to the capital that they have raised through share offerings. The ability of
liquid markets to facilitate investments with longer terms and higher potential returns contributes
to increased capital allocation and improved chances for long-term economic growth. The
greater safety and profitability of investments brought about by higher stock market liquidity can
also contribute to a rise in investment levels. To put it another way, investors will come if they
believe they can make a profit.
FINDINGS & SUGGESTIONS
Because stock markets drive economic activity by creating liquidity, they play an important role
in the Indian economy. Most of the early breakthroughs that marked the Industrial Revolution
were made possible by the availability of liquid financial markets. People who own stocks will
see their wealth decrease as a result of the stock market's impact on the Indian economy. A
considerable portion of pension plans' assets is invested in the stock market. As a result, a
significant drop in share prices diminishes the value of pension funds. Share price swings are
frequently a reflection of what is going on in the economy. Falling stock prices can make it
difficult for companies to raise capital in the stock market.
CONCLUSION
In the field of economics, one of the most hotly debated topics is the question of whether an
expanding stock market leads to or is a consequence of increased economic activity. In the
current study, a causal relationship between the expansion of the stock market and the expansion
of the economy in India is investigated. Using cointegration and causality tests, the research
shows that there is a well-defined long-run equilibrium relationship between stock market
development indices and economic growth in India from June 1991 to June 2013. The time span
covered by the study is June 1991 to June 2013. In addition, the empirical findings reveal a
unidirectional causality between turnover ratio and economic growth, as well as a bidirectional
causality between market capitalization and economic growth in both the long and short runs.
This is in contrast to the bidirectional causality between market capitalization and economic
growth in the short run. It is possible to draw the conclusion that market capitalization and
turnover ratio have an impact on the stock market development indices, which in turn have an
impact on the growth of India's economy. As a result of this, the current study suggests that
regulators of capital markets implement effective policy frameworks to promote the development
of the Indian stock market. This would result in a significant increase in the size, depth, and
liquidity of the Indian stock market, which in turn would lead to an increase in economic
activity. In addition, the government should prioritise the development of the stock market by
easing laws and listing requirements for investors. This will attract more market participants to
the stock exchange, which will increase competition and the quality of investments in securities.
This will have a significant impact on the expansion of India's economy.
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