Analysis of the Relationship between the Stock

market development and Economic growth in India

Introduction
ThemainobjectivebehindpromotingthedevelopmentofstockmarketsinIndiawas
tocontributetoraisingcapitalandassistingitsallocationprocessinorderto
strengthentheIndianeconomy.Consequently,inordertoinvestigatewhetherthe
IndianStockMarketsachievesitsobjectiveinenhancingtheeconomicgrowthofthe
country,thischapterproposesasimpleplausibleframeworkforstudyingsome
elementsofgrowththatrelatetothemainaspectsofthefunctionsoffinancial
markets.EconomicGrowthinIndiaisoftenbiasedbythebeliefsinfashionor
distortionsofperceptionswhichshapeconventionalwisdom.
InadevelopingcountrylikeindiaamovementinthestockMarkethasaninstant
effectontheeconomy.TheStockmarketandtheeconomicgrowthhaveadirect
relationshipwhichwillbefurtherexplainedinmyresearchpaper.
Thustheparticularquestionsthatwearetryingtoanswerinthisresearcharethe
following:doesthedevelopmentofthestockmarkethaveanyinfluenceon
India'srealeconomicgrowth?Ifitdoes,havethelevelofstockmarketdevelopment
influencedIndia'seconomicgrowth?

Importanceofthestudy
The role and impact of stock markets on the economic development process have not
received as much attention as other elements of the financial sector. Historically, the
economists have focused on banks. In the last decade the availability of more
appropriate data has increased the number of empirical researches in this field. Debate
exists, however, over the signs of the effects of stock markets on economic growth:
many theoretical studies suggest that stock market development slows economic
growth. We as students very well know about the economy and the stock market but
the link between them is rather known, hence to highlight the link through graphs and
statistics is the importance of my study.

LiteratureReview
There are many studies that emphasise the links between the state of development of a
country's financial sector and the level and rate of economic growth. The argument
essentially is that the functions the financial sector provides are anessential catalyst
of economic growth. This type of empirical study started with Goldsmith (1969), and
McKinnon (1973), and more recently, Ghani (1992), King and Levine (1993a, b),
Degregorio and Giudotti (1995), Rousseau and Wachtel (1998), Beck et al., (2000),
Levine et al., (2000), Levine (2000) and others. While all these studies utilize bank
measures of financial development, with the exception of a very few recent empirical
works (Atji and Jovanovic (1993), Hargis (1997), and Levine and Zervos (1996,
1998)), the role of stock markets in the economic development process has been
completely ignored. A part of the problem may stem from the absence of indicators
that can accurately measure the extent of stock market development.
Bencivenga and Smith (1991) construct a model that by pooling the economy's
resources eliminates liquidity risk and invests more efficiently. In their model, a bank
enables individuals to pool liquidity risks and can promote higher growth by shifting
the composition of savings towards more capital accumulation and by reducing
unnecessary capital liquidation. Banks channel funds from risk-averse savers to
entrepreneurs who invest in productive capital and hence provide liquidity to the
former group by enabling them to hold bank deposits instead of other liquid and
unproductive assets. These funds are then available for investment in capital
accumulation and thus reduce the need for the self-financing of investment.
The role and impact of stock markets on the economic development process have not
received as much attention as other elements of the financial sector. Historically, the
economists have focused on banks. In the last decade the availability of more
appropriate data has increased the number of empirical researches in this field. Debate
exists, however, over the signs of the effects of stock markets on economic growth:
many theoretical studies suggest that stock market development slows economic
growth. With regard to this debate on the relationships between stock market
development and economic growth, a detailed discussion of the stock market
functions is mentioned above, and how these functions affect economic growth.

ObjectiveoftheStudy

Understand the Economic situation and condition of the country

Understanding the link between stock market and the economy as a whole
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.

Variables

GDP
National income

Interest rates
Exchange Rate

Methodology of the study

Data collected for the study will be secondary.

The data collected will be analysed through graphs statistical tools like graphs,
line charts, averages, range, standard deviation and variance.

Sources

Relationship between Stock Market Development and economic growth- An

Empirical evidence from India by Swapnil Saxena (Lambert Publications).

http://www.eurojournals.com/finance.htm
International Journal of finance and Economics

By:AkshitDesai
6BcomHonorsB
1411004