IRJMST

Vol 5 Issue 8 [Year 2014]

ISSN 2250 1959 (0nline) 2348 9367 (Print)

ROLE OF STOCK MARKET IN ECONOMY DEVELOPMENT

Anju Dagar
(Assistant Professor , IITM)
ABSTRACT
Stock Market is one of the most vigorous sector which plays an important role in contributing to the
wealth of an economy. Growth rate of stock market signify growth percentage rise in economy. There is
a strong positive relationship between stock market development and economic growth & help to
efficiently direct the flow of savings and investment in the economy in ways that make possible the
stockpiling of capital. It fulfills a central function in the economy which bring together savers and
investors (providers of capital) & with companies and the state (borrowers) on the other. The main
objective is to analyze the link between stock market performance & economic development.
The Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and the Calcutta Stock
Exchange (CSE) are the three large stock exchanges of Indian Stock Market & London stock exchange
is oldest stock market in the world. The primary function of the stock exchange is to play the most
important role of supporting the growth of the industry and commerce in the country.
Keyword: - Stock Market, Economy development, GDP, NSE, BSE.CSE, LSE, Wealth
INTRODUCTION
A Stock exchange or securities market is a systematic market where listed securities are purchased &
sold according to well defined rules & regulation of Indian Securities Contracts (Regulation) act of
1956.
In other words: A stock exchange is an entity that provides "trading" facilities for stock brokers and
traders to trade stocks , bonds , and other securities . Stock exchanges also provide facilities for issue
and redemption of securities and other financial instruments, and capital events including the payment of
income and dividends . Securities traded on a stock exchange include shares issued by companies, unit
trusts , derivatives , pooled investment products and bonds .
HISTORICAL EVOLUTION OF INDIAN STOCK MARKET
As already stated, the Indian Stock markets have played a significant role in the early attempts at
industrialization in India in the late nineteenth and early twentieth centuries. The early textile mills and
the first steel plants were funded in the stock market. Some of these capital raising exercises were large
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in relation to the size of the financial sector in those days. Beginning in the late fifties, the country
embarked on an inward looking socialistic model of development that sought to put the commanding
heights of the economy in the hands of the public sector. The state took control of the allocation of
resources in the economy as the banks and insurance companies were nationalized and development
financial institutions grew in importance. A regime of financial repression came into being and the stock
market stagnated. The period from 1984 to 1992 was in some ways the high water mark of the Indian
capital markets. As the markets responded enthusiastically to the first whiff of reforms in the mid 1980s
and to the major reform initiative of 1991, the stock market soared through the roof. From October 1984
to September 1992, the stock market index went up more than ten times representing an annual
compound return of 34percent The Sensex crossed the 1,000 mark on July 25, 1990; the 4,000 mark on
March 30, 1992; the 5,000 mark on October 11, 1999; the 6,000 mark on January 2, 2004; the 7, the
9,000 mark on December 09, 2005; and finally the historic 10,000 mark on February 7, 2006. It created
another landmark when it touched 11,000 on March 27, 2006. The Sensex reached an all time high of
12,671 in May 2006. To reach from the 11,000 mark to the 12,000 mark only took 19 working days, the
shortest time interval for a 1000 points climb in BSE Sensex history, surpassing the just set record of 29
days that it took to reach 11,000 from 10,000.
There are 23 stock markets In India. The Bombay Stock Exchange (BSE)(1994), the National Stock
Exchange
(NSE)(1994) and the Calcutta Stock Exchange (CSE) are the three large stock exchanges. There are
many small
regional exchanges located in state capitals and other major cities & Nifty and Sensex are moving
around to 5900 and 19600 (July 2013). All activities of Indian stock market are regulated and controlled
by SEBI.
REVIEW OF LITERATURE
Gupta (1972) in his book has studied the working of stock exchanges in India and has given a number of
suggestions to improve its working. The study highlights the' need to regulate the volume of speculation
so as to serve the needs of liquidity and price continuity. It suggests the enlistment of corporate
securities in more than one stock exchange at the same time to improve liquidity. The study also wishes
the cost of issues to be low, in order to protect small investors. Panda (1980) has studied the role of
stock exchanges in India before and after independence. The study reveals that listed stocks covered
four-fifths of the joint stock sector companies. Investment in securities was no longer the monopoly of
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Vol 5 Issue 8 [Year 2014]

ISSN 2250 1959 (0nline) 2348 9367 (Print)

any particular class or of a small group of people. It attracted the attention of a large number of small
and middle class individuals. It was observed that a large proportion of savings went in the first instance
into purchase of securities already issued.
According to Levine and Zervos (1996), stock market liquidity is a robust predictor of real per capita
GDP growth only after controlling for initial income, initial investment in education, political stability,
fiscal policy openness to trade, and macroeconomic stability. In Levine and Zervos study, the remaining
stock market development proxies do not exhibit a robust link with long-run growth. In particular,
volatility is insignificantly correlated with growth in most specifications in that study. Similarly, market
size, international integration, capita accumulation, productivity improvements, and private savings rates
are not robustly linked with growth within th Levine and Zervos (1996) framework.
Tuncer and Alovsat (2001) examined stock market-growth nexus and found a positive casual correlation
between stock market development and economic activities. Chen and Wong (2004) elaborated that the
nexus between stock returns and output growth and the rate of stock returns is a leading indicator of
output growth.
Levine (2003) shed some empirical light on the ambiguous predictions about the relationship between
stock market liquidity and economic growth. The paper presents cross-country evidence on the
association between one measure of stock market liquidity the total value of stock transactions divided
by GDP and average economic growth rates over the period 1976 1993. The data suggest that there
is a strong positive relationship exists between long-run economic growth rates and stock market
liquidity. This positive relationship is found to be robust even to various changes in the containing
information set.
L.C.Gupta (1992) revealed the findings of his study that there is existence of wild speculation in the
Indian stock market. The over speculative character of the Indian stock market is reflected in extremely
high concentration of the market activity in a handful of shares to the neglect of the remaining shares
and absolutely high trading velocities of the speculative counters. He opined that, short- term
speculation, if excessive, could lead to "artificial price". An artificial price is one which is not justified
by prospective earnings, dividends, financial strength and assets or which is brought about by
speculators through rumours, manipulations, etc. He concluded that such artificial prices are bound to
crash sometime or other as history has repeated and proved.
Pyare Lal Singh (1993) in the study titled, Indian Capital Market - A Functional Analysis, depicts the
primary market as a perennial source of supply of funds. It mobilises the savings from the different
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sectors of the economy like households, public and private corporate sectors. The number of investors
increased from 20 lakhs in 1980 to 150 lakhs in 1990 (7. 5 times). In financing of the project costs of the
companies with different sources of financing, the contribution of the securities has risen from 35.01%
in 1981 to 52.94% in 1989. In the total volume of the securities issued, the contribution of debentures /
bonds in recent years has increased significantly from 16.21% to 30.14%.
Amanulla & Kamaiah (1995) conducted a study to examine the Indian stock market efficiency by using
Ravallion co integration and error correction market integration approaches. The data used are the RBI
monthly aggregate share indices relating five regional stock exchanges in India, viz Bombay, Calcutta,
Madras, Delhi, Ahmedabad during 1980-1983. According to the authors, the co integration results
exhibited a long-run equilibrium relation between the price indices of five stock exchanges and error
correction models indicated short run deviation between the five regional stock exchanges. The study
found that there is no evidence in favour of market efficiency of Bombay, Madras, and Calcutta stock
exchanges while contrary evidence is found in case of Delhi and Ahmadabad.
Debjit Chakraborty (1997) in his study attempts to establish a relationship between major economic
indicators and stock market behavior. It also analyses the stock market reactions to changes in the
economic climate. The factors considered are inflation, money supply, and growth in GDP, fiscal deficit
and credit deposit ratio. To find the trend in the stock markets, the BSE National Index of Equity Prices
(Natex) which comprises 100 companies was taken as the index. The study shows that stock market
movements are largely influenced by, broad money supply, inflation, C/D ratio and fiscal deficit apart
from political stability.
Redel (1997) concentrated on the capital market integration in developing Asia during the period 1970
to 1994 taking into variables such as net capital flows, FDI, portfolio equity flows and bond flows. He
observed that capital market integration in Asian developing countries in the 1990_s was a consequence
of broad-based economic reforms, especially in the trade and financial sectors, which are the critical
reason for economic crises which followed the increased capital market integration in the 1970s in many
countries will not be repeated in the 1990s. He concluded that deepening and strengthening the process
of economic liberalization in the Asian developing countries is essential for minimizing the risks and
maximizing the benefits from increased international capital market integration.
Harris (1997) investigates the different effects of stock market liquidity on economic growth for
developed and less developed countries using two stage least squares. The full sample used in the study
covers 49 countries between 1980 and 1991. Stock market activity is measured as the total annual value
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of shares traded in 1980 as a percentage of GDP. The paper finds no significant effect of stock market
activity on economic growth for the full sample and for the sub-sample of less developed countries. It
does find stock market to be significant in the developed sub-sample.
Rousseau and Wachtel (2000) also empirically assess the importance of stock market and banks for
economic growth. They employ panel techniques to annual data over 1980-1995 for 47 countries. As a
measure of stock market liquidity they use two different proxies: value of the traded shares divided by
GDP and market capitalization of all shares traded on the main stock exchange of a given country
divided by GDP. Both the value of the traded shares and market capitalization are deflated by the price
index of the national stock exchange. To measure bank development they use M3 divided by GDP.
First-differenced GMM estimator is used to analyze the relationship between the variables. Using
slightly different proxies to stock market liquidity and bank
development from Beck and Levine (2004) and different econometric methods, they find strong
evidence that liquid stock markets have a significant positive effect on growth.
OBJECTIVES OF THE STUDY
Every study based on some clearly defined objectives & Objectives determine the all over frame of any
study. The objective of this study is role of Stock Market performance in economic development. The
present study based on following objectives: To find out the perspective of researcher in relation to Indian Stock Market & Economic development.
To know the upshot of Indian stock market on Indian economy
To understand the impact of important happenings on the Indian Stock exchange.
To understand the correlation of Indian stock market with long term economy growth.
ROLE OF STOCK MARKET EFFECTS ON THE ECONOMY
The stock market has been assigned an important place in economic development through provide for
entrepreneurs and governments assembling resources which provide liquidity & improve the scheduling
the activities & resources and enhance prospects of long term economic growth. Without a stock
exchange, savings & economic progress and productive efficiency- would remain underutilized. In the
old days, the task of mobilization and allocation of savings could be attempted by a much less
specialized institution than the stock exchanges. But as business and industry expanded and the
economy assumed more complex nature, the need for 'permanent finance' arose. Entrepreneurs needed
money for long term whereas investors demanded liquidity the facility to convert their investment into
cash at any given time. The stock market provides listed companies with a platform to raise long-term
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capital and also provide investors with a forum for investing their surplus funds. It encourages investors
with surplus funds to invest them in additional financial instruments that better matches their liquidity
preferences and risk yearning. Better savings mobilization may increase the savings rate, and which in
turn prompt investments and earns investment income to the owners of those funds.
Economists have traditionally researched on the role of financial development to the economic growth
of countries.
More recently, the stock market therefore serves as an appropriate tool in the mobilization and allocation
of savings among competing uses which are critical to the growth and efficiency of the economy. It is in
this light that the stock exchange market acts as a barometer for economic performance in the sense that,
it assists to allocate the necessary capital needed for the consistent growth of an economy. In a later
study, further argued that the determination of the overall growth of an economy depends on how
efficiently the stock market performs in its allocative functions of capital. When the stock market
mobilizes savings, it simultaneously allocates a larger portion of the same to firms with relatively high
prospects as indicated by their returns and level of risk. The significance of this function is that capital
resources are channelled by the mechanism of the forces of demand and supply to those firms with
relatively high and increasing productivity thus enhancing economic expansion and growth. Emphasis
has been increasingly shifted to stock market indicators and the effect of stock markets on economic
Development. Although some analysts view stock markets in developing countries as casinos that
have little positive impact on economic growth; recent evidence suggests that stock markets may give a
big boost to economic development. In fact, the focus on stock markets as an engine of economic
growth is a new opening in financial literature. Going further, its benefits had been largely ignored in the
past, but now there is consensus concerning the positive effects brought about by stock markets.
BLACK TUESDAY
This is the date or we can say the great depression day in the economy i.e.,October 29th, 1929 of the
most famous stock market crash in history. Stocks lost 13% of their value on Black Tuesday.
It intimated the start of the Great Depression & effect the economy. October 29, 2013 marks the
84thanniversary of Black Tuesday. Black Tuesday is considered the most catastriphic day in stock
market history because it was the date of the largest stock market crash in US history. On Black
Tuesday, the market lost $14 billion and around 16 million shares were traded throughout the day.

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Vol 5 Issue 8 [Year 2014]

ISSN 2250 1959 (0nline) 2348 9367 (Print)

Black Tuesday's losses alone were not enough to cause the Great Depression. However, psychologically,
it demolishes confidence in the economy. That's because, in those days, people believed the stock
market was the economy.
Stock Market Crash of 1929 Facts
October 24 -- Black Thursday.
October 28 -- Black Monday.
October 29 -- Black Tuesday.
November 23, 1954 -- The day when the Dow finally regained the high reached on September 3, 1929.
The August 2011 stock markets fall was the sharp drop in stock prices in August 2011 in stock
exchanges across the United States, Middle East, Europe and Asia. This was due to fears of infirmity of
the European sovereign debt crisis to Spain and Italy, as well as concerns over France's current AAA
rating,[1] concerns over the slow economic growth of the United States and its credit rating being
downgraded. Severe volatility of stock market indexes continued for the rest of the year.
CONCLUSION
This paper empirically the relation between stock market performance & economy development. It links
the stock market with economy growth. Stock markets also give a platform to perform. In past times, it
is ignored by the researchers & authors but in recent year, focused on it. This is new opening in relevant
works of stock market & economy development
SUGGESTION
Stock market performance & economic growth is just like a two sides of a coin. As stock market
increases economy is also fast in growth on the other hand downfall in market performance means
slowdown of economy growth. Both are related to each other so we would create new ways to maintain
growth of market , savings & more investment .There is a need for economic growth in India, thats why
emphasis should be more on the functioning of stock market.
REFERENCES
1. .Vazakidis, Stock Market Development and Economic Growth, American, Journal of Applied
Sciences,
6(11), (2009), 1932-1940.
2. Seyyed, Emerging Stock Market Performance and Economic Growth, American Journal of Applied
Sciences, 7(2), (2010), 265-269.

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