Indian Stock markets in the midst of Covid crisis

During these tough times, stock market is soaring high, settling above the 50000 mark this past Tuesday. The reason is the simple. The people in India gaining hopes for everything comes to normal as the vaccination drive is picking up fast. The hopes of people rose and so does the index of stock markets. Stock markets just reflects the human nature.

High Sensex means high development? Right?

Wrong. Historically, it has already been proved many times, that the relation between the Sensex and economic development is not direct but, it could be other way around. If we take note of the recent evidences, C P Chandrasekhar & Jayati Ghosh in their article published last year. made affirmations that, when India experienced the pandemic crisis last year for the first time, the Sensex ,  climbed well above 38,000.  These were mostly on account of the cumulative inflows from abroad and at the same time, this is peculiar to India in comparison to the other Asian emerging markets.

One of the reasons for such inverse relation could be attributed to the proportion of population engaged in the stock and capital markets in India. Out of a population of about 1.36 billion, only about 3.7 percent make their investment in the equities and capital and stock markets.

This proportion is minuscule, as compared to other large economies of the world and it is then, not appalling, not to find India among the top ten stock markets worldwide.

Nature of Indian investor

India is a home of household savings, which has recently jumped to 22.5 % of GDP. These all savings directly or indirectly, has to play its part in the cycle of investment. Therefore, it will not be exaggeration to say that India is home to large number of investors.

 But these investors are still believing and rely upon the banking sector the most. So, India’s investors are of traditional in nature. Most of the investments are made in the instruments like Fixed deposits, etc. This may sound secure in comparison to the other volatile instruments like stocks and debentures, but the loss on account of inflation, might outnumber the savings and benefits from such banking instruments.  According to a recent estimate by PIB, there has been an increment in the WPI food index- based inflation from 3.21 % to that up to the level of 5.328 %.

There is no doubt that the financial literacy has been increased in India, though to the greater extent,  but now, the necessity is also the shifting the focus of this financial literacy.

Why Indians needs to invest in stock markets?

Primarily for the benefit, that the individual will gain from the rising profits of a company. India is a developing country, with huge and varied scope and potential. Lot more opportunities has to come or arise in India to meet the existential needs of the growing nation, for example, in the fields of infrastructure, where about trillions of investments has to be made. Secondly, to defeat the devil of inflation. Inflation is bound to rise, if one looks it in the context of the existence of huge scope of the construction and infrastructural sector, the capital goods sector, which obviously has the characteristic of large gestation periods.

In addition, large section of population can avail the advantages from the inflow of foreign investment. Finally, may be the most important. A greater number of indigenous people, if make investment in the stock markets, lesser the volatility of the stock market of a nation would be.

A study by Nazir, Nawaz and Gilani on the “Relationship between economic growth and stock market development” in the African journal of business management, asserts the point that by enhancing the stock markets and the market capitalization, the nation can move to the higher trajectory of  economic growth.

So, the stock market is the linchpin for India?

Not exactly, a study Lenuta Carp on emerging markets in central and eastern Europe, emphasized that the ‘real’ investment is actually the linchpin for the high economic growth, which can have impact upon the stock market in the form of positive externalities.

Though, the investment like in the field of infrastructure, is imperative for the economic growth of the nation, but, at the same time, the growth of stock market cannot be neglected.

Though India has a wider economic inequality, financial development is the necessity and not the financial liberalization as emphasized by Bumann and others on their study on’ financial liberalization and economic growth‘.

About the author

vipal

My name is Vipal Bhagat, going to be doctorate in applied economics. My aim is to analyse and interpret the current economic happenings around us, according to the core and basic principles of economics.

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