CHAPTER 1

STOCK MARKET OF INDIA

INTRODUCTION

Stock markets refer to a market place where investors can buy and sell stocks. The price at

which each buying and selling transaction takes is determined by the market forces (i.e.

demand and supply for a particular stock).

Let us take an example for a better understanding of how market forces determine stock

prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an

upward movement in its stock price. More and more people would want to buy this stock (i.e.

high demand) and very few people will want to sell this stock at current market price (i.e. less

supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price

from the seller which will increase the stock price of ABC Co. Ltd. In earlier times, buyers

and sellers used to assemble at stock exchanges to make a transaction but now with the dawn

of IT, most of the operations are done electronically and the stock markets have become

almost paperless. Now investors’ don’t have to gather at the Exchanges, and can trade freely

from their home or office over the phone or through Internet.

CONCEPT OF STOCK EXCHANGE

The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an

"association, organization or body of individuals, whether incorporated or not, established for

the purpose of assisting, regulating and controlling business of buying, selling and dealing in

Securities".

Stock exchange as an organized security market provides marketability and price continuity

for shares and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it

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helps orderly flow and distribution of savings between different types of investments. This

institution performs an important part in the economic life of a country, acting as a free

market for securities where prices are determined by the forces of supply and demand. Apart

from the above basic function it also assists in mobilizing funds for the Government and the

Industry and to supply a channel for the investment of savings in the performance of its

functions.

The Stock Exchanges in India as elsewhere have a vital role to play in the development of the

country in general and industrial growth of companies in the private sector in particular and

helps the Government to raise internal resources for the implementation of various

development programmes in the public sector. As a segment of the capital market it performs

an important function in mobilizing and channelizing resources which remain otherwise

scattered. Thus the Stock Exchanges tap the new resources and stimulate a broad based

investment in the capital structure of industries.

A well developed and healthy stock exchange can be and should be an important institution

in building up a property base along with a socialist in India with broader distribution of

wealth and income. Thus Stock Exchange is a vital organ in a modern society. Without a

stock exchange a modern democratic economy cannot exist. The system of joint stock

companies financed through the public investment as emerged has put the vast means of

finances almost to entrepreneur’s needs. Indian

Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.

The earliest records of security dealings in India are meager and obscure. The East India

Company was the dominant institution in those days and business in its loan securities used

to be transacted towards the close of the eighteenth century.

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By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in

Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers

recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage business

attracted many men into the field and by 1860 the number of brokers increased into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased

to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous

slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be

sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in Bombay,

the "Native Share and Stock Brokers' Association" (which is alternatively known as “The

Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it

was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry. After

1880, many mills originated from Ahmadabad and rapidly forged ahead. As new mills were

floated, the need for a Stock Exchange at Ahmadabad was realized and in 1894 the brokers

formed "The Ahmedabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to

Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.
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After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which

was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between

1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange

Association".

In the beginning of the twentieth century, the industrial revolution was on the way in India

with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company

Limited in 1907, an important stage in industrial advancement under Indian enterprise was

reached.

Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally

enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100

members. However, when boom faded, the number of members stood reduced from 100 to 3,

by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a

rapid increase in the number of textile mills and many plantation companies were floated. In

1937, a stock exchange was once again organized in Madras - Madras Stock Exchange

Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange

Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the

Punjab Stock Exchange Limited, which was incorporated in 1936.

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Existing structure of the stock exchanges in India

The Act recognizes stock exchanges with different legal structure. Presently the stock

exchanges which are recognized under the Securities Contracts (Regulation) Act in India

could be segregated into two broad groups – 20 stock exchanges which were set up as

companies, either limited by guarantees or by shares, and the 3 stock exchanges which are

functioning as associations of persons (AOP) viz. BSE, Ahmedabad Stock Exchange and

Indore Stock Exchange. The 20 stock exchanges which are companies are: the stock

exchanges of Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati,

Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras, Magadh, Managalore, NSE, Pune,

OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Of these, the stock exchanges of

Ahmedabad, Bangalore, BSE, Calcutta, Delhi, Hyderabad, Madhya Pradesh, Madras and

Gauhati were given permanent recognition by the Central Government at the time of setting

up of these stock exchanges. Apart from NSE, all stock exchanges whether established as

corporate bodies or Association of Persons (AOPs), are non-profit making organizations.

Powers that may be exercised by the Stock Exchange

The powers of the stock exchange are to be exercised as per provisions in its bye-law. As per

SCRA Act any recognised stock exchange may, subject to the previous approval of the

[Securities and Exchange Board of India make bye-laws for the regulation and control of

contracts. The bye-laws can provide for the exercise of following powers by the stock

exchange

a. The opening and closing of markets and the regulation of the hours of trade;

b. Set up a clearing house for the periodical settlement of contracts and differences there

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under, the delivery of and payment for securities, the passing on of delivery orders and the

regulation and maintenance of such clearing house;

c. The regulation or prohibition of blank transfers;

d. The regulation, or prohibition of badlas or carry-over facilities;

e. The fixing, altering or postponing of days for settlements

f. The determination and declaration of market rates, including the opening, closing, highest

and lowest rates for securities;

g. The terms, conditions and incidents of contracts, including the prescription of margin

requirements, if any, and conditions relating thereto, and the forms of contracts in writing;

h. The regulation of the entering into, making, performance, rescission and termination, of

contracts, including contracts between members or between a member and his constituent or

between a member and a person who is not a member, and the consequences of default or

insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or

omission by a seller or buyer, and the responsibility of members who are not parties to such

contracts;

The regulation of taravani business including the placing of limitations thereon;

j. The listing of securities on the stock exchange, the inclusion of any security for the purpose

of dealings and the suspension or withdrawal of any such securities.

k. The method and procedure for the settlement of claims or disputes, including settlement by

arbitration;

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Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a

slump. But, in 1943, the situation changed radically, when India was fully mobilized as a

supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities, those

dealing in them found in the stock market as the only outlet for their activities. They were

anxious to join the trade and their number was swelled by numerous others. Many new

associations were constituted for the purpose and Stock Exchanges in all parts of the country

were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940)

and Hyderabad Stock Exchange Limited (1944) were incorporated.

In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the

Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,

amalgamated into the Delhi Stock Exchanges Association Limited.

History

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old

history.

18th East India Company was the dominant institution and by end of the century,

Century business in its loan securities gained full momentum

1830's Business on corporate stocks and shares in Bank and Cotton presses started in

Bombay. Trading list by the end of 1839 got broader

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1840's Recognition from banks and merchants to about half a dozen brokers

1850's Rapid development of commercial enterprise saw brokerage business

attracting more people into the business

1860's The number of brokers increased to 60

1860-61 The American Civil War broke out which caused a stoppage of cotton supply

from United States of America; marking the beginning of the "Share Mania"

in India

1862-63 The number of brokers increased to about 200 to 250

1865 A disastrous slump began at the end of the American Civil War (as an

example, Bank of Bombay Share which had touched Rs. 2850 could only be

sold at Rs. 87)

Pre-Independence Scenario - Establishment of Different Stock Exchanges

1874 With the rapidly developing share trading business, brokers used to gather at a

street (now well known as "Dalal Street") for the purpose of transacting

business.

1875 "The Native Share and Stock Brokers' Association" (also known as "The

Bombay Stock Exchange") was established in Bombay

1880's Development of cotton mills industry and set up of many others

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1894 Establishment of "The Ahmedabad Share and Stock Brokers' Association"

1880 - Sharp increase in share prices of jute industries in 1870's was followed by a

90's boom in tea stocks and coal

1908 "The Calcutta Stock Exchange Association" was formed

1920 Madras witnessed boom and business at "The Madras Stock Exchange" was

transacted with 100 brokers.

1923 When recession followed, number of brokers came down to 3 and the

Exchange was closed down

1934 Establishment of the Lahore Stock Exchange

1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange

1937 Re-organization and set up of the Madras Stock Exchange Limited (Pvt.)

Limited led by improvement in stock market activities in South India with

establishment of new textile mills and plantation companies

1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange Limited

was established

1944 Establishment of "The Hyderabad Stock Exchange Limited"

1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi Stocks

and Shares Exchange Limited" were established and later on merged into

"The Delhi Stock Exchange Association Limited"

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THE POST INDIAN SCENARIO

The depression witnessed after the Independence led to closure of a lot of exchanges in the country.

Lahore stock Exchange was closed down after the partition of India, and later on merged with the

Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and got recognition

only by 1963. Most of the other Exchanges were in a miserable state till 1957 when they applied for

recognition under Securities Contracts (Regulations) Act, 1956. Most of the exchanges suffered

almost a total eclipse during depression. Lahore Exchange was closed during partition of the country

and later migrated to Delhi and merged with Delhi Stock Exchange. Bangalore Stock Exchange

Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only

Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established

exchanges, were recognized under the Act. Some of the members of the other Associations

were required to be admitted by the recognized stock exchanges on a concessional basis, but

acting on the principle of unitary control, all these pseudo stock exchanges were refused

recognition by the Government of India and they thereupon ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India (mentioned

above). The number virtually remained unchanged, for nearly two decades. During eighties,

however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar

Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange

Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock

Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh

Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989),

Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock Exchange

Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990) and recently

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established exchanges - Coimbatore and Meerut. Thus, at present, there are totally twenty one

recognized stock exchanges in India excluding the Over the Counter Exchange of India

Limited (OTCEI) and the National Stock Exchange of India Limited (NSEIL).

Government policies during 1980's also played a vital role in the development of the Indian

Stock Markets.

POST –REFORMS STOCK MARKET SCENARIO

After the initiation of reforms in 1991, the Indian secondary market now has a three –tier
form the NSE was set up in 1994 .It was the first modern stock exchange to bring in new
technology , new trading practices , new institutions , and new products.
The OTCEI was set up in 1992 as a stock exchange providing small and medium sized
companies the means to generate capital.
In all, there are at present, 23 stock exchange in India –19 regional stock exchanges, BSE,
NSE, OTCEI, and the interconnected stock exchange of India (ISE)
The 19 regional stock exchanges are located at Ahmedabad, Bangalore, Bhubaneswar,
Kolkata, Cochin, Coimbatore, Delhi, Guwahati, Hydrabad, Indore, Jaipur, Kanpur, Ludhiana,
Chennai, Mangalore, Pune, Patna, Rajkot, and Vadodara. They operate under the rules, by
laws and regulations approved by the government and SEBI.

REFORMS IN INDIAN CAPITAL MARKET

The 1991_92 securities scam prompted the government to increases the pace of reforms in
the capital market. Several measures have been undertaken since then in both the primary and
secondarymarket.
Primary market reforms: Security exchange Board of India was set up in early 1988 as a non
statutory body was given power in January 1992.The two objective mandated in the SEBI act
are investor protection and orderly development of the capital market.
SEBI has introduced various guidelines and regulatory measures to improve conditions of
capital issues. As per these measures companies issuing capital in the primary market are

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now required to disclose and clarify all material facts and specific risk factors, if any, related
to their projects along with the basic information related to calculation of premium.

In order to ensure fair and truthful disclosures, SEBI has also introduced code of
advertisement for public issues. SEBI has made the underwriting of issue optional so as to
reduce the cost of issue. SEBI has also enhanced the minimum application size along with the
proportion of each issue allowed for firm allotment to institutions such as mutual funds.

SEBI has again introduced shares and takeovers and also frame conditions under which
disclosures and mandatory public offers are to be made to the shareholders.

SEBI has also brought merchant banking statutorily under its regulatory framework. Now the
merchant bankers are to be authorised by SEBI and to adopt stipulatory capital adequacy
norms and also abide by the code of conduct. Under the present framework, merchant
bankers are having greater degree of accountability in the documentation of offer and its issue
process.

In order to protect the interest of investors, the “Banker to the Issue” is now brought under
the control of SEBI. SEBI has also advised stock exchanges to collect a deposit of one per
cent of the issue amount from the companies in order to attain greater care and diligence for
timely action related to public issues of capital.

• With a view to maintaining integrity and ensuring safety of the market, various risk

containment measures have been initiated such as the mark to mark margin system, intra –

day trading limit, exposure limit, and setting up of trade / settlement guarantee fund.

• To enhance the level of investor protection, the process of dematerialization of securities

through the depository system and their transfer through electronic book entry is pursued

vigorously. For this purpose National Securities Depository Limited and central Depository

service was set up Issuing company is required to make continuing disclosure under the

listingagreement.

• One of the major reforms in the secondary market is the measure to improve corporate

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governance .this is a set of system and process designed to protect the interest of stake

holders.

• The insider trading regulations have been formulated prohibiting insider trading and making

it a criminal offence, punishable in accordance with the provision under the SEBI Act, 1992.

• In February 1999, trading terminal was allowed to be set up abroad for facilitating market

participation by nonresidents. Internet trading was permitted in February 2000.

How do the debt markets impact the economy?

1. Increased funds for implementation of government development plans. The government

can raise funds at lower costs by issuing government securities.

2. Conducive to implementation of a monetary policy.

3. Less risk compared to the equity markets, encouraging low-risk investments. This leads
to inflow of funds into the economy.

4. Higher liquidity and control over credit.

5. Opportunity for investors to diversify their investment portfolio.

6. Better corporate governance.

7. Improved transparency because of stringent disclosure norms and auditing requirements.

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INTRODUCTION OF INDIAN ECONOMY

PRE LIBERALISED ECONOMY

Early Indian Economy

Indian economy in the early period was a self sufficient economy comprising of several

villages. Indian villages produced and met their requirement according to division of labour

and their economic activity was restricted to village economy. Barter system prevailed as an

exchange mechanism. Basically, the primary activity was agriculture. Other services like

carpentry, weaving, hair dressing, etc. were offered by labourers who extended their services

based on hereditary. They received their wages as food products. In short, Indian villages

functioned as an independent republics and the only interference was from the King for

whom they paid taxes in kind. Thus, India had happy villages.

Prior to the British rule, religion, system of the society and king’s law influenced the

economy to a great extent. There prevailed caste system which decided the division of labour

for the benefit of the society’s economy. Further, the prevalence of joint-family system

helped them to pool their resources for their individual family benefit and also for the benefit

of the society. Another advantage of the joint-family system was that the cultivable lands

were not fragmented, yielding to better economic gains.

Another influencer of early Indian economy was the Hindu religion. The religious canters

also functioned as Indian trade centers. For example, major pilgrimage spots like Nasik,

Allahabad, Varanasi, etc. also functioned as centers of commerce and trade. Many trade and

commerce activities were linked to the religious festivals and functions. In short, the Hindu

religion acted as an indirect catalyst for the Indian economy.

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One of the major industries in early India was textile. Handicrafts were also part of the Indian

industrial activity. Indian textile products like shawls, dhotis, dopattas, woolen products,

cotton goods, etc. and handicraft products were exported to overseas markets, such as Egypt,

South East Asia, Greece, etc. It is worth noting that when Europe (birth place of modern

industrialism) was inhabited by uncivilized people, India was very popular for its

craftsmanship and rich economy.

Indian Economy during Colonialism

Indian land had been invaded and ruled by many outsiders, amongst which the British regime

was considered very important. British East India Company entered India in 1757 through the

Battle of Plessey and the Crown took the complete administration during 1858. Politically,

India was under the British rule for around two centuries and the Indian economy was

significantly influenced during their rule. Indian culture and administration too underwent a

major transition during British rule.

PRE-LIBERALIZATION POLICIES

Indian economic policy after independence was influenced by the colonial experience (which

was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian

socialism. Policy tended towards protectionism, with a strong emphasis on import

substitution, industrialization, state intervention in labor and financial markets, a large public

sector, business regulation, and central planning. Five-Year Plans of India resembled central

planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications,

insurance, and electrical plants, among other industries, were effectively nationalized in the

mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly

referred to as Licence Raj, were required to set up business in India between 1947 and 1990.

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Before the process of reform began in 1991, the government attempted to close the Indian

economy to the outside world. The Indian currency, the rupee, was inconvertible and high

tariffs and import licensing prevented foreign goods reaching the market. India also operated

a system of central planning for the economy, in which firms required licenses to invest and

develop. The labyrinthine bureaucracy often led to absurd restrictions — up to 80 agencies

had to be satisfied before a firm could be granted a licence to produce and the state would

decide what was produced, how much, at what price and what sources of capital were used.

The government also prevented firms from lying off workers or closing factories. The central

pillar of the policy was import substitution, the belief that India needed to rely on internal

markets for development, not international trade — a belief generated by a mixture of

socialism and the experience of colonial exploitation. Planning and the state, rather than

markets, would determine how much investment was needed in which sectors.

IMPACTS

 The low annual growth rate of the economy of India before 1980, which stagnated

around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%. At the

same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by

10% and in Taiwan by 12%.

 Only four or five licences would be given for steel, power and communications.

License owners built up huge powerful empires.

 A huge public sector emerged. State-owned enterprises made large losses.

 Infrastructure investment was poor because of the public sector monopoly.

 License Raj established the "irresponsible, self-perpetuating bureaucracy that still

exists throughout much of the country" and corruption flourished under this system.

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Rajiv Gandhi government (1984-1989)

 Government in the 80s, the government led by Rajiv Gandhi started light reforms. The

slightly reduced License Raj and also promoted the growth of the telecommunications

and software industries.

 The Vishwanath Pratap Singh government (1989–1990) and Chandra Shekhar

government (1990–1991) did not add any significant reforms.

Narasimha Rao government (1991-1996)

Crisis

The assassination of Prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi

in 1991 crushed international investor confidence on the economy that was eventually pushed

to the brink by the early 1990s.

As of 1991, India still had a fixed exchange rate system, where the rupee was pegged to the

value of a basket of currencies of major trading partners. India started having balance of

payments problems since 1985, and by the end of 1990, it was in a serious economic crisis.

The government was close to default, its central bank had refused new credit and foreign

exchange reserves had reduced to the point that India could barely finance three weeks’ worth

of imports.

A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an

IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic

reforms were forced upon India. That low point was the catalyst required to transform the

economy through badly needed reforms to unshackle the economy. Controls started to be

dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the

economy was opened to trade and investment, private sector enterprise and competition were

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encouraged and globalization was slowly embraced. The reforms process continues today and

is accepted by all political parties, but the speed is often held hostage by coalition politics and

vested interests.

Reforms

The Government of India headed by Narasimha Rao decided to usher in several reforms that

are collectively termed as liberalization in the Indian media. Narasimha Rao appointed

Manmohan Singh as a special economical advisor to implement liberalization.

The reforms progressed furthest in the areas of opening up to foreign investment, reforming

capital markets, deregulating domestic business, and reforming the trade regime.

Liberalization has done away with the Licence Raj (investment, industrial and import

licensing) and ended many public monopolies, allowing automatic approval of foreign direct

investment in many sectors. Rao's government's goals were reducing the fiscal deficit,

privatization of the public sector, and increasing investment in infrastructure. Trade reforms

and changes in the regulation of foreign direct investment were introduced to open India to

foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an

acclaimed economist, played a central role in implementing these reforms. New research

suggests that the scope and pattern of these reforms in India's foreign investment and external

trade sectors followed the Chinese experience with external economic reforms.

 In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to

licensing. Industrial regulation was rationalized.

 Abolishing in 1992 the Controller of Capital Issues which decided the prices and number

of shares that firms could issue.

 Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave SEBI

the legal authority to register and regulate all security market intermediaries.

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 Starting in 1994 of the National Stock Exchange as a computer-based trading system

which served as an instrument to leverage reforms of India's other stock exchanges. The

NSE emerged as India's largest exchange by 1996.

 Reducing tariffs from an average of 85 percent to 25 percent, and rolling back

quantitative controls. (The rupee was made convertible on trade account.) Encouraging

foreign direct investment by increasing the maximum limit on share of foreign capital in

joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority

sectors.

 Streamlining procedures for FDI approvals, and in at least 35 industries, automatically

approving projects within the limits for foreign participation. Opening up in 1992 of

India's equity markets to investment by foreign institutional investors and permitting

Indian firms to raise capital on international markets by issuing Global Depository

Receipts (GDRs).

 Marginal tax rates were reduced.

 Privatization of large, inefficient and loss-inducing government corporations was

initiated.

LATER REFORMS

 Atal Bihari Vajpayee's administration surprised many by continuing reforms, when it was

at the helm of affairs of India for five years.

 The Vajpayee administration continued with privatization, reduction of taxes, a sound

fiscal policy aimed at reducing deficits and debts and increased initiatives for public

works.

 The UF government attempted a progressive budget that encouraged reforms, but the

1997 Asian financial crisis and political instability created economic stagnation.

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 Right to Information Act (2005)

 Indo-US civilian nuclear agreement (2008)

 Right to Education Bill (2008)

Impact of reforms

The impact of these reforms may be gauged from the fact that total foreign investment

(including foreign direct investment, portfolio investment, and investment raised on

international capital markets) in India grew from a minuscule US $132 million in 1991-92 to

$5.3 billion in 1995-96.

Cities like Gurgaon, Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence

and economic importance, became centres of rising industries and destination for foreign

investment and firms.

Policy tended towards protectionism, with a strong emphasis on import substitution,

industrialization, state intervention in labor and financial markets, a large public sector,

business regulation, and central planning. Five-Year Plans of India resembled central

planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications,

insurance, and electrical plants, among other industries, were effectively nationalized in the

mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly

referred to as Licence Raj, were required to set up business in India between 1947 and 1990.

Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta Chandra

Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic policy. They

expected favorable outcomes from this strategy, because it involved both public and private

sectors and was based on direct and indirect state intervention, rather than the more extreme

Soviet-style central command system... The policy of concentrating simultaneously on

capital- and technology-intensive heavy industry and subsidizing manual, low-skill cottage

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industries was criticized by economist Milton Friedman, who thought it would waste capital

and labour, and retard the development of small manufacturers. The rate from 1947–80 was

derisively referred to as the Hindu rate of growth, because of the unfavorable comparison

with growth rates in other Asian countries, especially the "East Asian Tigers".

The Rockefeller Foundation's research in high-yielding varieties of seeds, their introduction

after 1965 and the increased use of fertilizers and irrigation are known collectively as the

Green Revolution in India, which provided the increase in production needed to make India

self-sufficient in food grains, thus improving agriculture in India. Famine in India, once

accepted as inevitable, has not returned since the end of colonialism.

It is paradoxical that India is a rich country (in terms of enormous natural and man power

resources) with poor people. India adopts a mixed economic model which is tending towards

economic liberalization in order to attain self-reliance.

Indian economy is characterized by lower per capita income, mass unemployment and under

employment, over-dependence of agriculture, over population, poor standard of living, low

level of capital formation, low levels of health and education facilities, etc. Indian population,

instead of being an asset, has most often proved to be a liability and economic distress. This

calls for more attention by the Government in the upliftment of the population. Thus, any

economic policy treatment in India will be viewed with a social mind frame.

During 1901, urban population which was at 10.8 per cent of total population has increased to

25.7 per cent during 1991. Further, almost the entire rural population of 1901 (213 million)

lives in urban India during 1991 (218 million). This indicates the extent of migration.

Savings and capital formation are very important for a country’s Economic development. The

gross domestic savings which was at Rs 2544 crore in 1960-61 rose to Rs 157186 crore in

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1992-93. The contribution of household sector to savings is the largest in India, followed by

public sector and private corporate sector. The rate of saving s in India to GDP is not

satisfactory due to several reasons, such as, low per capita income, poor performance of

public sector enterprises, poor contribution of private sector players and untapped rural

savings potential.

It is worth noting that the gross savings of corporate sector, for the period 1960-61 to 1992-

93, indicates an annual average growth rate of 14.23 per cent. However, when the savings

and capital formation in the private corporate sector are compared with the gross domestic

savings and capital formation, it has remained at more or less the same proportion around

one-eighth of the total domestic savings. This is an indication of the corporate sector’s

dependence on household sector savings for its long term capital requirements, which has led

to a broad based structure of share ownership pattern.

Indian economy has come a long way, especially after independence. Since independence,

the structure of the Indian economy has gone through several changes, out of which sectoral

contribution to the economy is the most vital one. The agricultural contribution to GDP is

declining gradually as seen in the Table below. While the contribution of industrial sector has

not improved to a great extend, the service sector’s contribution to GDP has notably

increased. One of the main reasons for this change can be attributed to the economic policies

of India.

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Sectoral Share in National Income

(figures in percentage)

1970-71 1995-96

Agriculture 50 29

Industry 20 28

Service 30 43

It has to be noted that though the contribution of agriculture to GDP has declined, still

majority of the population (around 67 per cent as per 1991 census) is depend on primary

sector. This is the reason for the failure of many multinationals in India. They fail to notice

this fact and over estimated the demand potential of their products.

SINCE 1991

Major improvements in educational standards across India have helped its economic rise.

Shown here is the Indian School of Business at Hyderabad, ranked number 15 in global MBA

rankings by the Financial Times of London in 2009.

In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion

for incumbents, removed price controls and reduced corporate taxes. While this increased the

rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse

of the Soviet Union, which was India's major trading partner, and the first Gulf War, which

caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found

it facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan

from IMF, which in return demanded reforms.

In response, Prime Minister Narasimha Rao along with his finance minister Manmohan Singh

initiated the economic liberalization of 1991. The reforms did away with the Licence Raj

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(investment, industrial and import licensing) and ended many public monopolies, allowing

automatic approval of foreign direct investment in many sectors.[55] Since then, the overall

direction of liberalization has remained the same, irrespective of the ruling party, although no

party has tried to take on powerful lobbies such as the trade unions and farmers, or

contentious issues such as reforming labour laws and reducing agricultural subsidies. Since

1990 India has emerged as one of the fastest-growing economies in the developing world;

during this period, the economy has grown constantly, but with a few major setbacks. This

has been accompanied by increases in life expectancy, literacy rates and food security.

While the credit rating of India was hit by its nuclear tests in 1998, it has been raised to

investment level in 2007 by S&P and Moody's. In 2003, Goldman Sachs predicted that

India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and

Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy

of the world, behind US and China. In 2009 India purchased 200 Tons of Gold for $6.7

Billion from IMF as a total role reversal from 1991.

Agriculture

Agriculture is the back bone of Indian economy for several centuries. The importance of

agriculture in Indian economy is prominently evident. Nearly 70 per cent of the population

depends on agriculture either directly or indirectly for their living.

According to 1991 Census Report, over 67 per cent of the work force is still engaged in

primary sector. However, employment in this sector is not wide spread. In other words, only

0.78 per cent of rural population (or 1.97 per cent of the rural work force) is employed in

allied activities, such as, livestock, forestry, etc. Considering India’s wide natural resource

24 | P a g e
potential (sea base, animal stock, etc.) this is a very negligible figure. Thus, there can be

found great untapped employment opportunities for rural work force in the allied sector.

Indian agriculture is characterized by lack of technology, low productivity, under employment,

multiplicity of crops, unequal distribution of land, predominance of small farmers, etc.

INDUSTRY

Industrialization is vital for a country’s economic development. Indian industrial sector is

characterized by under-utilization of resources, low capital formation, low level of

technology, and lack of skilled man power and social attitudes of the population. Indian

industrial development is also highly influenced by the political climate of India, the political

philosophy of the ruling party, the attitude and culture of the political administrators and

Indian Industrial Policies. Indian industry also depends highly on the attitudes and aspirations

of the Indian man power and Indian society.

The economic structure of India follows a mixed economy. Thus, the functioning of duel

sectors - public and private - exists in India. Public sector includes both public utility

undertakings and public enterprises. Due to several factors, such as, low returns, long time

lag, defense requirements, public utilities, large resource requirement, development of

backward regions, development of infrastructure, etc. the Government had to invest in certain

capital-intensive segments to share the burden of industrialization and to generate

employment opportunities. However, most of the public sector undertakings do not perform

well from the angle of profitability and/or efficiency for many reasons, like initial heavy

costs, capital-intensive industries, large capacities, heavy social costs, low priced products,

labour problems and high expense ratio, unprofessional manpower planning, etc.

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The role of private sector in Indian industrial development cannot be under stated. Private

sector is also sharing Government’s burden in certain heavy investment ventures today, like

infrastructure. This is due to the improved government policy towards private sector. The

Indian Government has been form time to time changing its industrial policies to suit the

economic and global environment in favor of industrial sector. Further, there can be found a

trend towards taking advantage of the liberalized industrial policy frame work. This is

vindicated by the various indicators of investment intentions. However, the private sector in

India faces several obstacles: undue delay by the government authorities, restrains on

capacity, over-dependence of public sector, price restrictions, small scale reservations,

finance, etc.

Though private sector is facing many problems, its contribution to Indian economy is

remarkable. For instance, India achieved a GDP growth rate of 7 per cent in 1995-96 for the

first time since 1950, despite a low agricultural growth rate of 2.4 per cent. The major factor

which contributed for this growth rate was achievement by the industrial sector which

registered a growth rate of 12.1 per cent in 1995-96.

SERVICE AND INFRASTRUCTURE SECTOR

For any developing nation development of service and infrastructure segment is very

important to reach its economic goals. India is successful in improving its service and

infrastructure areas. It is very evident that the role of service sector in Indian economic

development has increased by several notches from the fact that this sector which was

contributing only around 20 per cent during independence is contributing over 43 per cent

currently to India’s GDP.

Service and infrastructure sector is comprised of the following segments: Banking, Insurance,

Transport, Telecom and Power.

26 | P a g e
Banking

Performance of the banking sector is considered as a proxy for the economy as a whole, due

to banks' wide spectrum of exposure across industries. Unfortunately for India, the banking

sector has historically remained under the impact of non-competitiveness, poor technology

integration, high NPAs and grossly under productive manpower.

Banking sector in India has a wide mix, comprising of joint sector (scheduled and non-

scheduled banks), nationalized sector (Reserve Bank of India, State Bank of India and all

other nationalized commercial banks and post office savings bank), specialized corporate

financial institutions (specific industrial finance corporations and state finance corporations),

co-operative sector (co-operative banks and land development banks) and foreign sector

(foreign commercial banks and exchange banks).

Keeping in mind the socio-economic goals of the country, banks were under strict control of

the regulatory bank - Reserve Bank of India. For instance, during mid-1969, 14 major Indian

commercial banks were nationalized. One of the major criticisms against nationalization of

commercial banks was with respect to efficiency. And the critics were right. Since

nationalization, the operational efficiency of the commercial banks have come down, thanks

to the ‘public-sector working’ attitude of the bank work force. Since, their pay is not linked to

performance; there is no inducement for the banking staff to perform well. This has been

further, deteriorated by the poor quality to man power planning which is linked to selection of

inefficient staff on the basis of social reservations.

Insurance

Insurance sector in India has been enjoying a state-monopoly status in India for decades.

Under Indian conditions there is only two broad classifications of insurance companies: life

27 | P a g e
and non-life insurance. The life insurance activities are solely managed by Life Insurance

Corporation of India and the rest is handled by General Insurance Corporation of India.

Life insurance business was started in India during British rule. Prior to independence, there

were several insurance companies: Oriental Life Insurance Company, Bombay Life

Assurance, The Madras Equitable Life Insurance Society, Oriental Government Security Life

Assurance Company, etc. Most of the insurance companies were charging a very high extra

premium of 15 to 20 per cent, since they considered Indian lives as sub-standard.

These insurance companies prevailed during the time of independence failed to sustain on a

long term basis. As many as 25 companies were liquidated and another 25 companies had to

merge with other companies at a lost to the policy holders. This has forced the Government

of India in 1956 to nationalize all the 245 life insurance companies (154 Indian and 16

foreign), and form the Life Insurance Corporation of India.

Transport

A well developed transport system will support an economy in several ways : supports the

industry by increasing the efficiency of production, rises the demand through movement of

products, facilitates the location of an industry, helps the development of urbanization,

movement of man power, better standard of living, better education, etc. Contribution of

transport to Indian economy is very significant.

Indian transport sector comprises of all forms of transports: railways, roadways, water and air

transport.

Indian Railways, largest Indian public sector undertaking and largest railway system in Asia

run 12000 trains a day, with over 63000 route kms of track. Indian Railways has around 7000

railway stations. The total distance covered by the 12000 trains every day equals three and

28 | P a g e
half times the distance to moon. It takes a gigantic task of carrying nearly 11 million

passengers and 1.2 million tons of cargo per day. Indian Railways function as a major

employment generator in India. Of the 27 million people employed in the organized sector,

Indian Railways accounts for 6 per cent directly and an additional 2.5 per cent indirectly.

Totally about 1.6 million people are employed by Indian Railways.

The importance of road transport to Indian economy cannot be neglected. Road transport is

vital for the movement of agricultural products and also for industrial development. Thus,

roads quicken the rate of growth. Further, road transport functions as a supportive system to

railways. Railways can reach only certain locations, and the rest of the link is taken care by

road transport. At the time of independence India had only 388000 kms of roads. Today,

India has 2178008 km of road length, thanks to planning efforts.

The cheapest mode of transport is water transport, since water-ways provide readymade

routes and thus no infrastructure costs involved in developing journey routes, compared to

railway or road transport. India has both inland water and marine or shipping transport

facilities. India possesses about 14150 kms. Of navigable inland water-ways. Notable Indian

water-ways are: Ganga, Brahmaputra, Godavari, Krishna, Delta Canals, Mondovi, Zuari,

Buckingham Canal and back-waters and the west coast canals of Kerala. Considering the

geographical sea-base benefits of India, there is much scope to improve this mode of

transport in the country, especially the coast line transport.

Telecom

In an economic policy frame work where the role of markets and incentives based on the

price system are emphasized, infrastructural goods and services, such as telecommunications

are generally characterized by high fixed investments, long gestation lags and relatively low

29 | P a g e
profits, especially during the initial phases of operation. For a long period, almost all the

infrastructural projects in India were Government’s responsibility.

However, as India moved along the path of economic development, the process of

liberalization began and private sector’s supportive role was recognized. Telecom sector was

opened up for private sector participation into basic services and value added services with

the policy announcement in May 1994. In order to meet the rising demand in the telecom

sector, Indian Government decided to invite private players to supplant the government

supported agencies in rendering basic as well as value added telecom services. Though

opened up, barring a few areas like pagers and mobile phones, Indian telecommunication

sector is dominated by Department of Telecom (DOT) and two government companies -

VSNL and MTNL.

Power

Power is a vital input for the growth of industrial development of any nation - higher the

power, higher the industrial growth and higher the employment. Since independence most of

the projects in this sector has been financed and managed by government agencies -

Center or State (nearly 90 per cent or more investment required for the power sector came

from the public sector through Five Year/Annual Plans). However, since liberalization, the

role of private sector, inclusive of foreign players was recognized in the power projects.

Power projects involve huge investments and overseas support in terms of financing as well

as managing power projects become inevitable for a developing nation like India, since

electricity cannot be easily imported or stored and hence, creation of generation capacity

domestically is critical for meeting the country's demand for power. If the capacity

additions are not done in time, power shortages result in the system which leads to

inefficient operations and management, decelerate investment in other sectors of the

30 | P a g e
economy and hamper the growth process of the country in general. In India, the

endemic power shortages and cuts lead to inadequate capacity utilization, unproductive

expenditure such as in back-up generators and much waste, all of which impose a

major constraint on economic growth.

Power Finance

During post-independence era, power - one of the major core sector - has been funded by the

government/government agencies, when private participation was almost nil in power

sector, thanks to government policies. However, with liberalization, this core sector was

opened to private sector and consequently to the foreign players.

Further, due to constraints of funds with the Government of India, the public sector

would suffer from inadequacy of funds. With present levels of finances, only 20000MW

in each plan period could be built in the public sector. Thus, the rest (84000MW) is expected

to be financed through private sector, both Indian and foreign.

Since the cost outlay in power projects are huge, financing the projects through internal

accruals alone becomes inevitable; and further, the government is also slowly changing

withdrawing itself from the role of producer and trying to stick-on only as a regulator in

the long run. Thus, power producers has to look in for alternate source of financing such as,

term loans from financial institutions (internally and internationally) like World Bank,

ADB, ICICI, etc. and debt market in India and abroad.

Some 70 per cent of the finance required by the power sector over the next decade - total

estimated at about Rs.5000 billion (US $143 billion) - has to be found through debt.

While the sector could expect special consideration in the allocation of foreign debt

entitlement, the bulk of the debt finance will have to be raised in rupees. Identified level of

31 | P a g e
rupee debt at present is about 75 billion per annum. This would need stepping up

significantly.

The center has decided to allocate about Rs.14000 crore for nuclear energy to generate an

additional 1000MW during the Ninth Plan period. This is an Rs.1000 crore increase over the

Eight Plan period allocation which was Rs.13000 crore. Further, according to the

estimation of Finance Minister, around 22.5 per cent of the proposed voluntary disclosure

scheme for harnessing black money would be used for financing infrastructure projects and

basic minimum services program.

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 CHAPTER 2

LITERATURE REVIEW

INTRODUCTION

In this section a review of the theories surrounding the topic is covered and also the various
empirical studies that have been done on the relationship between stock market and economic
development. The history of the Nairobi securities exchange is also discussed here in terms of
growth and development and also looking at the various measures of economic growth and
defining economic growth.

Review of Theories

There is no one theory that looks exclusively on stock market indices and economic
development, most growth theories factor in the need for some elements such as capital and
the importance of financial intermediaries in the economy, some of these theories are
discussed below.

The Neoclassical Theory: The Exogenous Growth Theory

The neoclassical exogenous growth theory is also called the Solow-Swan growth model and
is built upon the basic neoclassical frameworks of long run economic growth. This
framework explains economic growth using four main components namely, productivity,
capital accumulation, population growth and technological progress. This theory states that
the long run economic growth is exogenously determined, that is, economic growth is
determined by factors outside the basic model specifications. The basic building block of this
theory is the production function which has constant labor (L) and capital (K) which are
reproducible. Therefore the equation is Output (Y) being a function of Capital (K)

The crucial aspect of the production function is the assumption of diminishing returns of
capital accumulation. This means giving labor more capital goods without technological
inventions will result in redundant investment of the new capital at a certain point. Another
basic premise of the neoclassical growth model is that there tends to be a convergence to a
steady state in the long run depending on the technological progress and rate of labor force
growth. It states that a country that has higher savings than other will tend to growth faster

33 | P a g e
than those with low savings. In the very long run the role of capital accumulation plays a
smaller role in this model than technological progress as nations move to the steady state. The
neoclassical growth model emphasizes mostly on the importance of technological innovation
in the long run growth to offset the effects of diminishing returns that affect both capital
accumulation and labor increases in the economy (Aghion and Howitt, 1998).

The Endogenous Growth Theory

In the endogenous growth theory, economic growth is seen to be as a result of internal and
not external forces, this means that households, investing in human capital and innovation
play a significant role in the growth of an economy. This theory focuses on the positive
externalities and spillover effects of a knowledge based economy which ultimately leads to
economic development. It is in contrast to the exogenous growth model that emphasizes the
role of technological processes as a scientific exogenous process that is not determined by
economic forces. The main feature of the endogenous growth model is that the broad
definition of capital stock is not subject to diminishing returns as with the exogenous growth
model (Fry, 1997).

This therefore means that growth is a positive function of the investment ratio. It states that in
the long run, economic growth will depend on the policy measures that are taken by different
governments. This implies that policies that embrace openness, competition and innovation
will promote growth (Aghion and Howitt, 1998).

Zervos (1998), emphasize on the fact that stock market liquidity measured as the value of
stock traded relative to the size of the market and the size of the economy is significantly and
positively related to the rate of economic growth.

Beck and Levine (2001), also confirm this similarity of significance in stock market
development in the course of economic growth and he argues that the expansion of both
banks and stock markets significantly affects growth. Atje and Jovanovich (1993) have more
so concluded that there is strong positive correlation
between the level of financial development and stock market development and economic
growth.

34 | P a g e
Creane et al. (2003), argued that a modern and efficient financial system mobilizes savings,
promotes investment by identifying and funding good business opportunities, monitors the
performance of managers, enables the trading, hedging, and diversification of risk, and
facilitates the exchange of goods and services. These functions ultimately result in a more
efficient allocation of resources, a more rapid accumulation of human and physical capital,
and in faster technological progress, which in turn feed economic growth.

35 | P a g e
 CHAPTER 3

RESEARCH METHODOLOGY

INTRODUCTION

This section highlights the design of the study which is going to take the form of a causality
test relation between the Stock market size, liquidity and economic growth in India. This
section also looks at the population for the study in question which is the all the companies
listed on the stock exchange and the Indian economy. Data will be mainly collected from the
World Bank for the period 1993-2019.

RESEARCH PROBLEM

The general consensus is that there is a positive relation between economic growth and
financial development with Levine coming to the conclusion that countries with well
developed financial markets have a better level of per capita income than those that do not
have a developed financial market system. As Yartey and Adjasi mentioned, stock market
liquidity is a problem with Indian stock markets were the markets are characterized by thin
trading and also low levels of liquidity and this is brought about due to various factors such
as a low investor knowledge base on the Indian stock markets and also trading access. This
therefore impedes the growth of Indian markets and also the level of per capita income and
hence economic growth

There lies some lack of consensus among various authors on the role played by stock markets
in the economy. Stiglitz argued that banks do a better job than stock markets in resource
allocation and hence in impacting economic growth. Added on to say that the instability and
volatility of stock markets leads to macroeconomic instability in the long run. Atje and
Javanovich concluded that stock markets contribute positively to economic growth while
authors like Jappeli and Pagano Boyd and Smith (stressed the importance of both institutions

Studies done on the causality between stock market and economic growth have also produced
conflicting result that is; the expected relation or direction of causality has been different for
one study and from the other.

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OBJECTIVES OF STUDY

PRIMARY OBJECTIVE:

 To understand the relationship between stock market development and economic

growth in pre and post liberalization of Indian economy.

SECONDARY OBJECTIVE:

 To study about the impacts of stock market on Indian economy.

 To study about the significant growth of stock market and Indian economy.

 To study about the status of capital market and Indian economy in pre and post
liberalized economy of India.

The objective of this study will be to determine causality relationship between the stock
market size (market capitalization), liquidity and economic growth in India

There are following scope of the study:-

 Relationship between stock market and Indian economy.

 Impact of stock market on the growth of industrial sector of India and vice-versa.

 Relationship between stock market and different sectors of Indian economy.

 Impact of stock market on gross domestic product (G.D.P.).

Stock market and Indian economy affects each other in significant way.

So in this study I identified that area of Indian economy which are related with the
fluctuation and variation of stock market..

37 | P a g e
SCOPE OF STUDY

There are various significant impacts on the Indian economy and industrial sector. Its

contribution to the economy reflects the importance of the Indian stock market. So there are

following importance of the topic of research paper.

 Study of the impact of stock market on Indian economy.

 It helps to understand the reflection of the stock market fluctuation on industrial

sectors and their growth.

 Study of stock market impact on gross domestic product (GDP).

 Help to understand the contribution to the better corporate governance.

 It helps to understand the significance impact on the higher liquidity and control over
credit.

 Debt markets impact the economy?

 Increased funds for implementation of government development plans. The

government can raise funds at lower costs by issuing government securities.

 Conducive to implementation of a monetary policy.

 Less risk compared to the equity markets, encouraging low-risk investments. This
leads to inflow of funds into the economy.

 Higher liquidity and control over credit.

 Opportunity for investors to diversify their investment portfolio.

 Better corporate governance.

 Improved transparency because of stringent disclosure norms and auditing

requirements.

There are following use and importance of the topic apart from above points:-

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  Impacts On Stock Market After Liberalization

 Impacts on Indian economy after liberalization

 Comparative study of various factors that affects the economy and stock market.

RESEARCH DESIGN

The study will adopt a test of causation in order to look at the relationship between Stock
market development and economic growth in India over a twenty year period from 1993-
2019. The reason for this method is that in business, the cause and effect relationship is often
ambiguous and there is therefore need to improve understanding on the relationship in
question so as to better explain, predict and control the variables in question. The overall aim
to aid investors, government and all other stakeholders involved in making informed
decisions on policy directions and predictions on both the stock market and economy using
the variables in question.

POPULATION

All companies listed on the Bombay Stock Exchange and the Indian economy will make up
the population to be looked at for this paper.

HYPOTHESIS

 NULL HYPOTHESIS

Stock market development is not related with economic growth.

 ALTERNATE HYPOTHESIS

Stock market development is related with economic growth.

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DATA COLLECTION

Secondary data is collected for the period 1991-2019 as mentioned above and the sources of
the data will be the World Bank statistics website & BSE websites. The data to be collected
from the World Bank & BSE websites will be for both measures of stock market
development and also the Indian GDP. All of the results are on an annual basis as provided
by the World Bank (World Bank website, 2018).

Type of Data Used:-

There are basically two types of Data

 Primary Data

 Secondary Data

But here in the research report, I have used only secondary data. Which provides relative data

regarding the research.

Primary Data:-

Primary Data is first hand information that the researcher collects. It helps in collecting useful

and most accurate information that is needed for the researcher to do his research.

Secondary Data:-

Secondary data is what the researcher collects from different sources. It also help researcher

to get elaborate information to do his research.

Sources of Secondary Data:-

 Internet

 Journals

 Data From other organization

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DATA ANALYSIS

Technique used for analysis & interpretation:-

 Bar Diagram

 Correlation Analysis

41 | P a g e
 CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

ANALYSIS OF DATA COLLECTED

There is a saying: stock markets have predicted 10 out of the last 3 recessions.

With plummeting share prices making headline news, it is worth considering the impact of

the Stock market on the economy. How much should we worry when share prices fall? How

does it impact on the average consumer? And how does it affect the economy?

Economic Effects of Stock Market

1. Wealth Effect

The first impact is that people with shares will see a fall in their wealth. If the fall is

significant it will affect their financial outlook. If they are losing money on shares they will

be more hesitant to spend money; this can contribute to a fall in consumer spending.

However, the effect should not be given too much importance. Often people who buy shares

are prepared to lose money; their spending patterns are usually independent of share prices,

especially for short term losses.

2. Effect on Pensions

Anybody with a private pension or investment trust will be affected by the stock market, at

least indirectly. Pension funds invest a significant part of their funds on the stock market.

Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This

means that future pension payouts will be lower. If share prices fall too much, pension funds

can struggle to meet their promises. The important thing is the long term movements in the

42 | P a g e
share prices. If share prices fall for a long time then it will definitely affect pension funds and

future payouts.

3. Confidence

Often share price movements are reflections of what is happening in the economy. E.g. recent

falls are based on fears of a US recession and global slowdown. However, the stock market

itself can affect consumer confidence. Bad headlines of falling share prices are another factor

which discourages people from spending. On its own it may not have much effect, but

combined with falling house prices, share prices can be a discouraging factor.

4. Investment

Falling share prices can hamper firms’ ability to raise finance on the stock market. Firms who

are expanding and wish to borrow often do so by issuing more shares – it provides a low cost

way of borrowing more money. However, with falling share prices it becomes much more

difficult.

As I said earlier there is an oft repeated quote saying the stock market has predicted 10 out of

the last 3 recessions. The point is that falling stock markets do not necessarily predict the

economic future. Share prices can fall without causing a downturn in the economy. For

example, one thinks of the stock market crashes of October 1987; there wasn’t an obvious

economic factor causing this share price fall. The major economies remained relatively

unaffected by this stock market crash. In fact, the UK had record growth in the late 1980s.

This time the stock market fall is due to economic weaknesses so is a better guide to future

economic performance.

How does the economy affect stock investments?

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A stock’s price will go up and down based on what investors think about that individual

company, its industry sector, or its competitors. But the economy can also play a role in stock

prices. Stock prices go up and down in response to:

 Interest rates: The Bank of Canada can raise or lower interest rates to stabilize or

stimulate the Canadian economy. This is known as monetary policy. If a company

borrows money to expand and improve its business, higher interest rates will affect

the cost of its debt. This can reduce company profits and the dividends it pays

shareholders. As a result, the stock price may drop.

 Economic outlook: If it looks like the economy is going to expand, stock prices may

rise. Why? Investors may buy more stocks thinking they will see future profits and

higher stock prices.

 Inflation: Inflation means higher consumer prices. This often slows sales and reduces

profits. Higher prices will also often lead to higher interest rates. For example, the

Bank of Canada may raise interest rates to slow down inflation. These changes will

tend to bring down stock prices. However, commodities and some industries and

companies can do better with inflation, so their prices may rise.

 Deflation: Here, the cost of goods and services drops. A dollar buys more. Interest

rates rise, so people borrow less. They often wait to buy goods in the hope that

prices will drop more. The Great Depression (1929-1939) was one of the worst

periods of deflation ever.

 Economic shocks: Big changes in the world can affect both the economy and stock

prices. For example, let’s say energy costs rise. This can affect a lot of companies

and consumers and lead to lower sales, lower profits, and lower stock prices.

Another example is an act of terrorism, which can lead to a downturn in economic

activity and a fall in stock prices.

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  Changes of government: A new government can make new policies. Sometimes

these changes can be seen as good for business, and sometimes not. Sometimes

they may lead to changes in inflation and interest rates. These changes may affect

stock prices.

 The value of the Canadian dollar: Many Canadian companies sell products to

buyers in other countries. If the Canadian dollar rises, their customers will have to

spend more to buy Canadian goods. This sometimes drives down sales, which in

turn can lead to lower stock prices. On the other hand, when the price of the

Canadian dollar falls, it makes it cheaper for others to buy our products. This can

make stock prices raise.

Watch these videos of Camilla Sutton, Scotia Capital currency strategist, with Rob Carrick

from the Globe and Mail discussing how you can become your own currency analyst, how

currency affects investment returns and what is driving the Canadian dollar right now.

In the pre liberalized period the Indian economy is more instable. At that time it become

negative due to various constraint and other factors. There are following two charts which

reflect the pre and post liberalized position of Indian economy. These charts reflects the

variation in economic system through GROSS DOMESTIC PRODUCT ,which more

appropriate measure of Indian economy.

45 | P a g e
PRE-LIBERALISED PERIOD:

GDP of INDIA at factor cost(in percent)

12

10

4
GDP
2

0
1955-56

1961-62

1977-78

1983-84

1989-90
1951-52
1953-54

1957-58
1959-60

1963-64
1965-66
1967-68
1969-70
1971-72
1973-74
1975-76

1979-80
1981-82

1985-86
1987-88
-2

-4

-6

INDEPENDENCE TO 1991

Indian economic policy after independence was influenced by the colonial experience (which

was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian

socialism. Policy tended towards protectionism, with a strong emphasis on import

substitution, industrialization, state intervention in labor and financial markets, a large public

sector, business regulation, and central planning. Five-Year Plans of India resembled central

planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications,

insurance, and electrical plants, among other industries, were effectively nationalized in the

mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly

referred to as Licence Raj, were required to set up business in India between 1947 and 1990.

46 | P a g e
  Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta

Chandra Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic

policy.

 Indian GDP becomes three times negative before reforms period.

 To set up a strong economic system Indian government has taken a steps to reform all

its economic policies under the narsimham committee.

POST REFORM PERIOD:

After the liberalization period the Indian economy shows a positive. Prime Minister

Narasimha Rao along with his finance minister Manmohan Singh initiated the economic

liberalisation of 1991. The reforms did away with the Licence Raj (investment, industrial and

import licensing) and ended many public monopolies, allowing automatic approval of foreign

direct investment in many sectors.[55] Since then, the overall direction of liberalisation has

remained the same, irrespective of the ruling party, although no party has tried to take on

powerful lobbies such as the trade unions and farmers, or contentious issues such as

reforming labour laws and reducing agricultural subsidies. Since 1990 India has emerged as

one of the fastest-growing economies in the developing world; during this period, the

economy has grown constantly, but with a few major setbacks. This has been accompanied

by increases in life expectancy, literacy rates and food security.

Following chart reflects the attitude of GDP after the reforms period.

47 | P a g e
Impact of Global Recession on Indian Market

In the globalized market scenario, the impact of recession at one place/ industry/ sector

perculate down to all the linked industry and this can be truly interpreted from the current

market situation which is faced by the world since approx 2 month and still the situation is

not in control in spite of various measures taken to fight back the recession in the market. The

badly hit sector at present being the financial sector, and major issue being the "LIQUIDITY

Crises" in the market.

In-spite of the various measures to subsidies the impact of the recession and cut down the

inflation present nothing really sound have been done.

Various steps taken by RBI to curb the present recession in the economy and counter act the

prevailingsituation.

The sudden drying-up of capital inflows from the FDI which were invested in Indian stock

markets for greater returns visualizing the Potential Higher Returns flying back is continuing

48 | P a g e
to challenge liquidity management. At the heart of the current liquidity tightening is the

balance of payments deficit, and this NRI deposit move should help in some small way.

Because of the various reforms and improvement in various sectors strengthen the Indian

economic system. After the reforms period Indian GDP reflects the positive trends.

The reforms progressed furthest in the areas of opening up to foreign investment, reforming

capital markets, deregulating domestic business, and reforming the trade regime.

Liberalization has done away with the License Raj (investment, industrial and import

licensing) and ended many public monopolies, allowing automatic approval of foreign direct

investment in many sectors. Rao's government's goals were reducing the fiscal deficit,

privatization of the public sector, and increasing investment in infrastructure. Trade reforms

and changes in the regulation of foreign direct investment were introduced to open India to

foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an

acclaimed economist, played a central role in implementing these reforms. New research

suggests that the scope and pattern of these reforms in India's foreign investment and external

trade sectors followed the Chinese experience with external economic reforms.

49 | P a g e
TABLE NO. 1

INDIAN ECONOMIC GROWTH & STOCK MARKET PERFORMANCES

S.N YEAR BSE SENSEX GDP GROWTH RATE

1 1991 1000 3.2
2 1992 2000 5.7
3 1993 2500 1.3
4 1994 3100 5.1
5 1995 3127 5.9
6 1996 3260 7.3
7 1997 3694 7.3
8 1998 3060 7.8
9 1999 5000 4.8
10 2000 6000 6.5
11 2001 3467 5.1
12 2002 3390 4
13 2003 5915 5.4
14 2004 6779 8.5
15 2005 9000 7.1
16 2006 14000 7.5
17 2007 20000 9
18 2008 21000 9.5
19 2009 17464 9.2
20 2010 21000 6.7
21 2011 15550 7.2
22 2012 15448 6.72
23 2013 22000 6.69
24 2014 28000 4.47
25 2015 30000 4.74
26 2016 36700 7.2
27 2017 34000 7.1
28 2018 38000 6.7
29 2019 39000 7.3

50 | P a g e
INTERPRATATION

In above given table the Indian economic growth rate is presented along with the Stock

market performances (i.e. BSE). The data is taken for 29 years from 1991 to 2019. As

Sensex index is increasing the GDP growth is also increasing along with that. It states that

stock market development has positive impact on Indian economy

CORRELATION ANALYSIS

INTERPRETATION

The above calculated value is Karl Pearson correlation. By taking 29 variable in GDP growth

rate as well as BSE sensex and using 1 tailed test the correlation coefficient is 0.312 i.e

greater than 1. It means the stock market development & Indian economic growth is

51 | P a g e
moderately positive correlated with each other. And it’s clear that stock market development

have positive impact on Indian economy growth.

TABLE NO. 2

INDIAN ECONOMIC GROWTH & STOCK MARKET

PERFORMANCES

S.N YEAR BSE SENSEX GDP GROWTH RATE

1 1991 1000 3.2
2 1992 2000 5.7
3 1993 2500 1.3
4 1994 3100 5.1
5 1995 3127 5.9
6 1996 3260 7.3
7 1997 3694 7.3
8 1998 3060 7.8
9 1999 5000 4.8
10 2000 6000 6.5
11 2001 3467 5.1
12 2002 3390 4
13 2003 5915 5.4
14 2004 6779 8.5
15 2005 9000 7.1
16 2006 14000 7.5
17 2007 20000 9
18 2008 21000 9.5
19 2009 17464 9.2
20 2010 21000 6.7
21 2011 15550 7.2
22 2012 15448 6.72
23 2013 22000 6.69
24 2014 28000 4.47
25 2015 30000 4.74
26 2016 36700 7.2
52 | P a g e
 27 2017 34000 7.1
28 2018 38000 6.7
29 2019 39000 7.3

A COMPARATIVE CHART OF SENSEX IN PRE AND POST LIBERALIZED ECONOMY:

SENSEX HISTORICAL DATA

45000

40000

35000

30000

25000

20000 Sensex
year
15000

10000

5000

0
1991

1995

2000

2004

2008

2017
1992
1993
1994

1996
1997
1998
1999

2001
2002
2003

2005
2006
2007

2009
2010
2011
2012
2013
2014
2015
2016

2018
2019

The above chart reflect that before the reform the BSE Sensex is below 2000 and after the

reforms it shows a positive trends because of following reason:

53 | P a g e
  The major step taken in the reform is the Establishment of SECURITIES

EXCHANGE BOARD OF INDIA. Which regulate the whole stock market?

 Entry of foreign institutional investor, who played a very important role in the success

of stock market.

 Rules and regulation which strengthen the stock market.

 Economic perspective of the Indian stock market performance.

 After the reforms Indian stock exchanges has taken various step such as:

Establishment of National Stock Exchange, Depositories, introduction of mutual fund,

Dematerialization of securities etc…

 Electronic trading also a positive effort taken by the SEBI to make stock market more

effective.

TABLE NO. 3

INDIAN ECONOMIC GROWTH & STOCK MARKET PERFORMANCES

YEAR BSE SENSEX GDP GROWTH RATE SENSEX in '000

1991 1000 3.2 1
1992 2000 5.7 2
1993 2500 1.3 2.5
1994 3100 5.1 3.1
1995 3127 5.9 3.127
1996 3260 7.3 3.26
1997 3694 7.3 3.694
1998 3060 7.8 3.06
1999 5000 4.8 5
2000 6000 6.5 6
2001 3467 5.1 3.467
2002 3390 4 3.39
2003 5915 5.4 5.915
2004 6779 8.5 6.779
2005 9000 7.1 9
2006 14000 7.5 14
54 | P a g e
 2007 20000 9 20
2008 21000 9.5 21
2009 17464 9.2 17.464
2010 21000 6.7 21
2011 15550 7.2 15.55
2012 15448 6.72 15.448
2013 22000 6.69 22
2014 28000 4.47 28
2015 30000 4.74 30
2016 36700 7.2 36.7
2017 34000 7.1 34
2018 38000 6.7 38
2019 39000 7.3 39

45

GDP GROWTH RATE

40
SENSEX in '000
35

30

25

20

15

10

0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

55 | P a g e
INTERPRATATION

The above chart reflect that since 1991 the BSE sensex and GDP Growth rate is showing

positive trend. As Sensex is rising the GDP is also rising along with that. But in some year

higher rise in Sensex does not show higher rise in GDP because of government policies like

demonetization, GST etc.

WHY STOCK MARKETS AND BANKS BOTH, INDEPENDENTLY OF EACH

OTHER, BOOST ECONOMIC GROWTH?

Although the empirical evidence is consistent with the view that stock markets and banks

promote economic growth independently of each other, the reasons are not fully understood.

One argument is that stock markets and banks provide different types of financial services.

Stock markets offer opportunities primarily for trading risk and boosting liquidity; in

contrast, banks focus on establishing long-term relationships with firms because they seek to

acquire information about projects and managers and enhance corporate control. (There is, of

course, some overlap. Like stock markets, banks help savers diversify risk and provide liquid

deposits. Like banks, stock markets may stimulate the acquisition of information about firms,

because investors want to make a profit by identifying undervalued stocks to invest in; stock

markets may also help improve corporate governance by simplifying takeovers, providing an

incentive to improve managerial competency.)

56 | P a g e
 CHAPTER 5

FINDINGS

FINDINGS OF THE RESEARCH:

 Indian economy and Indian stock market are positively related to each other. A positive

growth of Indian economy reflects the significant growth of Indian stock market. Apart

from this a positive growth in stock market investments reflects the growth in valuation of

organization which ultimately leads to the growth of the Indian economy.

 There are significant impacts of reforms on Indian economy. Step taken by Indian

government are strengthen the economic system.

 Capital market reforms influence the investments pattern of foreign as well as domestic

investors.

 Indian economy leads to the growth of stock market with positive correlation.

 Indian stock market is the gateway to increase the value of the organization. Where open

trading of various securities reflects the market value of the organization.

 With the development in Indian economy since pre liberalized period stock market get

positive development.

 Indian government has taken various steps to strengthen the stock market and economic

system.

 Apart from Indian economy, the stock market affected from various other factor such as:

investments from foreign institutional investors, Demand and supply of order to buy or

sell the various securities.

 Indian economy also affects from various other factor such as: various sector as service,

transportation, power etc...

57 | P a g e
 CHAPTER 6

CONCLUSION

In developing countries like India the positive growth of economy and stock market is

possible through the proper strategies and balance of both. On the basis of analysis and

findings, it is clear that economy leads the stock market and vice-versa.

 The Indian stock market is uncertain but fundamentally it depends upon economic

condition and various other factors.

 Economic condition of developing countries like India depend upon income and

consumption pattern and growth of industrial, service , transportation sectors etc…

 The combination of both stock market and economic development leads to the rapid

growth of any individual country.

 Highly affected economy from the foreign investments.

 The stock market is driven by changes in economic growth.

 Economic performance

By 1995, the Indian stock markets were busy restructuring their systems. The industry

continued to consolidate/restructure, improved its efficiency and shifted focus from

capacity creation to cost competitiveness.

 Remember: Many factors can affect stock prices as well as economy of the country.

58 | P a g e
 CHAPTER 7

RECOMMENDATION

After the analysis of the project study, following recommendations can be made:

 Simplifying procedures and relaxing entry barriers for business activities and

providing investor friendly laws and tax system for foreign investors.

 There should be strict rules and regulation for strengthen the stock market and

economy of the country.

 Government should taka care economic system and regulation of stock market to

protect the interest of Indian people.

 There should be strict regulatory framework for economic and stock market activities.

 Indian government should emphasis on infrastructure development which leads the

Indian economy as well as stock market through change in investments pattern of

Indian people.

 More emphasis on untouched sector of Indian economy at the time of policy

formulation.

 There should be positive correlation between stock market development and Indian

economy.

59 | P a g e
BIBLIOGRPHY

I have used following references to prepare this research report. The bibliography includes:

WEB SITES:

www.bseindia.com

www.economywatch.com

www.wikipedia.com

www.google.com

www.sharemarketbasics.com

http://www.worldbank.org/

JOURNAL:

Journal of national stock exchange.

Journal of financial management

BOOKS:

Indian Financial system, Khan M Y

Financial Services, Dharamraj E

60 | P a g e