SHARE MARKET AND ITS IMPACT ON THE INDIAN

ECONOMY
1. Introduction and objective of the project
The share market is a platform where buyers and sellers come together to trade on publicly
listed shares during specific hours of the day.
People often use the terms ‘share market’ and ‘stock market’ interchangeably. However, the
key difference between the two lies in the fact that while the former is used to trade only
shares, the latter allows you to trade various financial securities such as bonds, derivatives,
forex, etc.
The role of stock markets as a source of economic growth has been widely debated. It is well
recognised that stock markets influence economic activity through the creation of
liquidity.
Liquid financial market was an important enabling factor behind most of the early
innovations
that characterised the early phases of the Industrial Revolution

2. Identifying the causes, consequences, and remedies

There are several vital roles that stock markets play in an economy's financial structure.
They are-

 Capitalization

One of its main purposes is the stock market's ability to help companies get funds.
Businesses raise money for various uses, including research and development, project
investment, operations expansion, and stock issuance (equity securities via IPO Investment).
Investors give firms the funds to expand and generate economic value by buying these
stocks.

 Availability of Liquid Assets

The stock market offers investors liquidity by providing an easy-to-use platform for buying
and selling stocks. Since it enables investors to quickly turn their assets into cash, liquidity is
significant. It also promotes investment by giving investors who wish to sell their shares an
exit route.

 Discovering Prices

The supply and demand of stocks are the primary factors influencing prices in the stock
market. It provides a forum for investors to voice their thoughts regarding a company's
worth. Market prices are established due to continuous stock trading and represent
investors' assessments of a company's past, present, and future performance.
 Wealth Generation

This is an essential role that the stock market plays. Buying stock in companies with a price
increase allows investors to profit significantly. As a result of this expansion, individual
investors gain from capital appreciation.

 Dividend Payout

A company's shareholders receive dividends, which are payouts generated by earnings. This
gives shareholders a reliable source of income.

 Risk Transfer

A certain amount of risk is associated with stock market investing. Investors risk seeing their
assets lose value due to shifting market dynamics or the success of the businesses they
fund. When investors trade stocks, they are sharing and transferring these risks.

 Financial Measurement

It's common knowledge that the state of the economy as a whole can be inferred from stock
market performance. In contrast, a dropping market may portend future downturns or
economic instability. A rising stock market can reflect both economic growth and investor
optimism.

 Market Efficiency

Stock prices in efficient markets are updated promptly and precisely based on available
information. In turn, this promotes market efficiency and openness by incentivizing
businesses to give the public timely and accurate data.

3. Various stakeholders and the effect on each of them

 Brokers
A broker is a member of a recognised stock exchange and is registered with the SEBI. You
can deal in securities in stock exchanges through brokers as only they are permitted to trade
on the screen-based trading system of stock exchanges. A broker is entitled to execute
trades only in those exchanges where they are a member. Thus, a broker, who is a member
of the Bombay Stock Exchange, can trade only on the BSE trading platform and not on other
exchanges.
 Stock Exchanges
Stock exchanges are the organisations that provide platforms to companies to raise capital
through IPOs and trade in their shares and bonds through investors and traders. Along with
equities and bonds, various other products are traded on the exchanges, such as Exchange
Traded Funds (ETFs), investment funds, single stock futures and options, index futures and
options, currency derivatives, commodity derivatives and interest rate derivatives.
BSE and NSE are the major Indian exchanges which provide platforms for corporates to raise
money from the capital market and list their shares.
 Depositories
Nowadays, trading only shares and bonds in electronic form is allowed, which makes
depositories an important part of the stakeholder matrix. Depositories facilitate the holding
of securities in electronic form and also enable securities transactions to be processed by
book entry. As of now, there are two depositories in India, viz., Central Depository Services
(India) Ltd (CDSL) and National Securities Depository Ltd (NSDL).
 Depository Participant
A depository participant is an agent of the depository and offers depository services to
investors, including the dematerialisation of physical shares. Financial institutions, banks,
custodians and stockbrokers are allowed to act as depository participants.
The depository system, of which depositories and depository participants are the main
constituents, has effectively eliminated paper-based certificates that were more prone to
losses, forgery, damage and other problems, resulting in bad deliveries.
 Companies
A capital market without companies is like a stage without actors. Therefore, the listing of
companies on the stock exchanges, usually through an initial public offering (IPO), is crucial
and a thorough analysis of the stakeholders of a company is crucial for investors. Further, to
facilitate small and medium-sized companies to get listed on stock exchanges, both BSE and
NSE have opened separate platforms for such types of companies.
Government
The government (through its ministries, agencies and departments) plays multiple roles in
the capital market – regulator, influencer and participant. The Ministry of Finance, the
Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI) are also among
the stakeholders of the capital market.
The Securities and Exchange Board of India (SEBI) is the regulatory authority established
under a special Act of the Parliament to protect the interests of the investors in securities
and to promote the development of the capital market. It is also often referred to as the
market regulator, as it prevents malpractices and ensures orderly development. The agency
is also responsible for managing and monitoring if its rules and regulations are being
implemented by all stakeholders.
The Reserve Bank of India (RBI) is the regulator of the Indian banking system. It is
responsible for the regulation of all banks, including those listed. As a regulator of the Indian
banking system, RBI, too, has a stake in ensuring the smooth functioning of the capital
market.
Both SEBI and RBI come under the purview of the Ministry of Finance, which is the final
authority on various aspects affecting the capital market. Raising funds through disinvesting
government stakes in PSUs is one of the ways through which the finance ministry tries to
finance the deficit.
 Investors and Traders
An investor is the mainstay of the capital market because they put in money to be utilised by
corporates as capital. An investor is a person or an institution who commits their funds to
the capital market with expectations of good returns. There are various categories of
investors, but they all have a common goal - to earn solid returns for their investments.

4. Advantages and disadvantages of situations or issued identified

ADVANTAGES
Appropriate for Growth: Selling business shares generates steady, predictable, long-term
financial growth. These revenues can be used by businesses to grow and flourish.
Simple Entry and Exit: Buying and selling shares of any company at a price determined by
supply and demand for that particular share allows for simple entry and exit on the stock
market.
Regulated Processes: A safe sanctuary for investors since listed businesses must comply with
strict disclosure obligations and regulatory restrictions set forth by stock exchanges and
market regulators. Stockbrokers who follow the route outlined by SEBI are not left behind.
Secure Clearing Procedure: Investors purchasing equities that will be sent to their Demat
Accounts are guaranteed a dependable and secure clearing procedure by the stock
exchanges.
DISADVANTAGES
Volatility: The stock market is a highly volatile market, with prices fluctuating frequently
based on a variety of factors such as global events, economic indicators, and company news.
These fluctuations can result in significant losses for investors who have invested in the
wrong stocks.
Risk: The stock market is a risky investment option as the value of the securities can be
affected by a variety of factors, including market trends, company performance, and global
events. There is always the risk of losing money, and investors should only invest what they
can afford to lose.
Fraud: While the stock market is highly regulated, there are still instances of fraud and
insider trading, which can result in significant losses for investors. Investors should be aware
of the risks involved and only invest in regulated markets and companies.
Time-Consuming : Investing in the stock market requires a significant amount of time and
effort to research and analyze the companies you are investing in. Investors must stay
informed about the market trends and company news to make informed investment
decisions.
Emotional Investing: The Stock market capital can be emotional, with investors often making
investment decisions based on emotions rather than logic. This emotional investing can lead
to poor investment decisions and significant losses.

5. Short-term and long-term implications of economic strategies suggested in

the course of research

Four categories of financial instruments are traded on the stock exchange.

These include:

1. Shares

A share represents a unit of equity ownership in a company, and

shareholders are entitled to any profits in the form of dividends and
bear any losses the company may face. Many investors manage
their shares through a Share trading app.

2. Bonds

To undertake long term and profitable projects, a company requires

substantial capital. One way to raise capital is to issue bonds to the
public. These bonds represent a “loan” taken by the company. The
bondholders become the creditors of the company and receive
timely interest payments in the form of coupons. From the
perspective of the bondholders, these bonds act as fixed income
instruments, where they receive interest on their investment as well
as their invested amount at the end of the prescribed period.
 3. Mutual Funds

Mutual funds are professionally managed funds that pool the money
of numerous investors and invest the collective capital into various
financial securities. You can find mutual funds for a variety of
financial instruments like equity, debt, or hybrid funds, to name a
few.

Each mutual fund scheme issues units that are of a certain value
similar to a share. When you invest in such funds, you become a
unit-holder in that mutual fund scheme. When instruments that are
part of that mutual fund scheme earn revenue over time, the unit-
holder receives that revenue reflected as the net asset value of the
fund or in the form of dividend payouts.

4. Derivatives

A derivative is a security that derives its value from an underlying

security. This can have a wide variety such as shares,
bonds, currency, commodities and more! The buyers and sellers of
derivatives have opposing expectations of the price of an asset, and
hence, enter into a “betting contract” with regards to its future
price.

One cannot truly understand the share market definition without knowing
how it works. Businesses use the stock market to raise capital by offering
investors ownership holdings. Shares of stock are the name given to these
equity investments.

Without incurring debt, companies can obtain the necessary funds to run
and grow their operations by listing the shares for sale on the stock
market. By trading their funds for shares on the stock market, investors
gain.

Investors benefit from corporations' efforts to grow and expand their

operations since these investments increase in value over time, resulting
in capital gains for the stockholders. Furthermore, as their revenues
increase, businesses distribute dividends to their stockholders.

While they fluctuate greatly over time, individual stocks' performances are
considered collectively. The stock market is one of the most dependable
methods to increase your money because it has traditionally given
investors average yearly returns of about 10%.

Now that you know what is share market, let’s uncover some of its advantages:
 A stock market that has been by and large bullish in its activities will
generally influence economic policy makers to raise interest rates.
However, it also needs to be noted that stocks underperform during
periods marked by restrictive monetary policies. This results in
 spiraling equity indexes provoking the Government to tighten
monetary outflows, that ultimately results in the stock market
pulling back

The objective of this project is to see how share market affects Indian economy and
understand more about it.

The stock market serves as a benchmark for the economy’s overall health.
If the stock market is booming, it’s often assumed that the economy is
growing at an all-time high. If the stock market struggles, it is considered
a bad sign for the economy as everything seems uncertain. The stock
market may influence the economy through the wealth effect mechanism,
investment and funding, economic sentiments, and factor use. Through
the above-mentioned mechanisms, stock market movements profoundly
influence the Indian economy. If the stock market thrives, investor wealth
rises, increasing consumer activity and eventual growth. Conversely, the
opposite trend instigates uncertainty in this case and slows the
development of many processes.
The following are the ways the stock market affects the Indian economy:

 Wealth Effect: Stock market performance affects investors' wealth,

ranging from retail to institutional. When the market is healthy,
people feel more secure and capable of spending, which can drive
the economy forward and support industries. The reaction is
immediate: consumers expect further upswings and purchase goods
and services.

 Wealth Effect

The markets get their volatile character from the price fluctuations of
individual stocks. As prices increase or decrease, market volatility
influences businesses and consumers.

During a bull phase, the stock prices go up. More often than not, it boosts
the economy’s overall confidence. Likewise, consumer spending also rises
as individuals become more optimistic regarding the market and buy
more goods and services. So, businesses offering these products and
services begin to produce and sell more.
Additionally, a larger number of investors may enter the market, which
may push prices even higher. As a result, positive stock market
movements can contribute towards economic development. However, this
is not always the case.

A rise in stock markets is not always coupled with economic growth. If you
see 2021-22, stock markets breached all-time highs consistently, and
millions of new Demat accounts opened during this period, but our
growth, measured by GDP, fell in almost every quarter during the financial
year. This was because of the pandemic.

Investment and Financing: The stock market raises company capital

through share issuance. Companies require this capital to develop,
expand, innovate, and boost production. Increased production capacity
leads to job creation and economic growth.

 Economic Sentiment: The performance of the stock market helps

to shape the economic sentiment and people's attitudes towards
investing, purchasing, and selling. A strong market indicates safety
that sparks interest and willingness to invest. A market crawling
down is perceived as dangerous, thus making people wary.
 Inflation and Interest Rates: The stock market also affects
monetary policies and inflationary rates. A strong stock market
drives inflation: the more money people have, the more goods and
services they buy, driving the prices up. Following that, the RBI
increases interest rates to curb inflation and keep the economy on
track.
 Inflation Determines Stock Market Movement
 The Reserve Bank of India promotes and monitors price stability and
the country’s economic growth. Price stability can be measured in
terms of the rate of inflation change and this has a substantial
influence on the RBI’s monthly monetary policies. The CPI or
Consumer Price Index is the chief indicator of inflation and measures
changes in prices of consumer items. It is a gauge for determining
the increase in living expenses, the brunt of which has to be borne
by average consumers.
 The PPI or Producer Price Index measures inflationary changes in the
prices of producer goods. Should these keep increasing
substantially, manufacturers are most likely to pass on this price
increase to consumers and consequently affect their behaviour.
Fluctuations in oil prices globally too, have a significant impact on
the global economy since oil is a key principal indicator of economic
 progress and activity. Sudden increases in oil prices usually have
negative effects on most economies that are dependent on it.
Increased oil prices accelerate the prices of numerous consumer
goods because of the higher costs of their transportation.

Inflation can also be a key metric for corporate valuation. This

is because the higher the inflation, the higher is the discount rate and
lower the project value. Alternately, deflation too, is dangerous as it
leads to decreased revenue and layoffs in future for firms unable to
maintain full workforces. Lower corporate valuation, therefore has a
negative impact on stock markets globally.

 Resource Allocation: Last but not least, it assists in efficiently

distributing resources across different market sectors. Investors
want to maximise their gains and paste extra funds into companies
or industries they believe have the most significant potential.
 Corporate financing: One of the impacts of the share market on
the Indian economy is that the stock market allows Indian
companies to receive the funding to implement their growth, thus
promoting productivity, assuming that jobs are created and the
economy grows.
 Investor confidence: The stock market also impacts investor
confidence, as a growing market requires more interventions by
capital and stimulates economic growth.
 Investor Activity
 Economic indicators apart, investor activity measures are grand
market clues for participants. Contrary to popular belief, it’s the
bearish situation that is ideal for making investments and not bullish
conditions. The latter drives prices higher and makes analysis of
investors’ sentiment mandatory. As NRI investments continue to
grow in India, and the central bank buys more treasuries, the
interest rates often slip and this pushes stock prices higher. Less
buying on the contrary, with high interest rates, depresses stock
prices. It is also prudent to take note of market indicators like
decline/ advance ratios as well as the total number of highs and
lows recorded by the market. These indicate the overall health of
the stock market and confirm the “quality” of the stock market’s
progress or decline.
 Effects of Consumer Activity
 Sharp changes in consumer activity directly impact corporate profits
and thus, stock prices. consumer confidence here is a notable factor
because the confident consumer spends more. When markets are
on the rise, stock prices usually reflect the consumer’s future
opinions. Moreover, increased consumer confidence leads to higher
retail sales and encouraging shopping patterns. The consumer who
has a disposable income is also most likely to invest in real estate,
particularly housing, which again is a major economic indicator.
Available data from the real estate sector help market participants
 to deduce whether people are game to make heavy investments in
real estate or not.

 When Stock Markets Fall

In contrast, when stock prices fall for a considerable period (known as the
bear phase), they mostly affect negatively.

Individuals may lose their optimism, with news reports on these price
drops creating a sense of panic in the market. As a result, investors losing
money are reluctant to spend more or turn to lower-risk assets, leading to
a fall in consumer spending.

 Influences Pension Fund

Any individual with an investment trust or private pension is affected by

stock market movements, albeit indirectly. Many pension funds invest a
considerable part in stocks; a drastic and consistent fall in prices can
impact the value of these funds.

This also indicates lower payouts in the future. Furthermore, households

will have a lower income from pensions, pushing them away from
spending and saving more money.

 Positively Impacts the Bond Market

A stock market crash generally makes other investment vehicles more

attractive to investors. As a result, they can move out of shares and turn
to invest in bonds or gold. In fact, these investment instruments are
known to offer higher returns during periods of uncertainty.

The Employment Factor

Employment being a major indicator of a country’s economic progress,
has a profound impact on both stock and bond markets particularly in the
sphere of one-day movements when a country’s monthly employment and
unemployment statistics are announced. The employment situation also
influences consumer sentiment and consumer confidence, which again
reflect on the market’s performance.

It goes without saying that the labour market’s state influences the
economy’s well-being to a great extent. This in other words, implies that a
weak labour market may result in lesser corporate profits. This based on
the premise that with rising unemployment, people are unable to invest in
homes or indulge in necessary purchases responsible for driving corporate
profits.

The stock market is central to the Indian economy, impacting wealth

generation, investment, people's feelings, and where resources go. The
Indian stock market performance, through indicators
like Sensex and Nifty, seems almost the opposite of the nation's economic
health. Healthy stock markets invite foreign capital, galvanise domestic
sentiment, and increase individual investment, thereby advancing
economic growth simultaneously. For instance, adverse stock market
conditions can reside in uncertainty among financial institutions,
potentially staking their partaking in various forms of credit and loan
terms. In addition, its implications for inflation and interest rates, thereby
allowing resources to strike in big and small ways, showcases its
fundamental role in the Indian economic sense.