The stock market as an important barometer of economic growth

Many assume that the stock market represents the state of the economy.

That is the primary reason for this distorted obsession about the market. There are several factually incorrect assumptions about the role of the market, says R.

I T is that time of the year when many suggestions are offered to the Finance Minister to modify the Budget to boost the stock market and, through that, the economy. This year the market is already in an upswing. According to most experts on the Indian economy, what applies to the New York Stock Exchange NYSE or the Chicago Board of Trade CBOT and its relation to the US economy automatically applies to our stock market and its relationship to the economy.

The Finance Ministry mandarins too seem to be caught up in this web of confusion. That is the primary reason for this distorted obsession about the market, and there are several factually incorrect assumptions about the market's role.

Indian corporate sector is critical and has a dominant role in the economy. The major characteristic of Corporate India is that it accounts for 14 per cent of the national income. Incidentally, in activities like trade wholesale and retail , transport other than railways , construction, and hotels and restaurants, the share of non-corporate sector in national income is more than 70 per cent.

The service sector, consisting of all these activities is currently the main driver of GDP growth. In the last decade, the average annual growth rate of the service sector was more than 8 per cent, while the growth rate of the industrial sector was around 5 per cent.

The share of the corporate sector in our domestic savings is less than 5 per cent. In contrast, in developed countries it is more than 50 per cent. Hence the proposition that the corporate sector is critical to our economy is not borne out by facts. But it is repeated ad nauseum , since such is the case in the UK and the US, and one begins to think that this is so for all countries.

So proposition 1 is neither true nor valid; even if the entire corporate sector vanishes, the national income will only drop by some 14 per cent.

Incidentally, our national income is under-estimated by at least 30 per cent and to that extent there is no loss at all in the total picture. The stock market is the barometer for performance past and future of the corporate sector. There are nearly seven lakh companies in India, of which some 6, or so are listed on our exchanges. Though nearly 9, scrips are listed on our exchanges, more than half were not quoted or traded last year.

Another 25 per cent were quoted only a couple of times last year. The shares of just the top 10 companies commanded nearly 45 per cent of the trade turnover last year. Contrast this with the NYSE, where no single scrip normally enjoys more than one per cent of the turnover. Though market players and exchanges brag about India having the largest number of listed scrips like having the largest cattle population in the world , only about a hundred are active.

More than 70 per cent of trading, even in these hundred or so scrips, is not for delivering these shares. It is for squaring-off purposes. In other words, the participants do not even see these scrips, and a true "scripless trading" is in place. A substantial portion of the transaction is for gains or losses at the margin and it is the day-traders who square-off within the day who are active in the market.

Hence, the stock market is no barometer, either for India's corporates or its economy. The stock market helps channel savings in our economy. This is the most amusing assumption of the lot. At the best of times, the primary market did generate some savings from the public who saluted the spirit of entrepreneurship of several business groups, including the Oswals, the Bhansalis, the Orkay Mehras, the Deepaks and the Ruias.

The list is long, and those interested can go through the business journals of the last ten years particularly the cover stories that detail how these "whiz kids" and "visionaries" are going to build a modern, industrialised India. The savings data Table 2 suggests that at the best of times not for the investors , the proportion of "shares and debentures" as a percentage of financial savings of households was 17 per cent in the early s.

As of , it was less than 5 per cent. A large chunk of our investors are in postal savings, provident funds and life insurance funds. Hence we find that the corporate sector plays a small role in our economy while the share of the non-corporates is significant.

Stock Market Economy | Economy Watch

The latter are not listed in the market; they are not even companies. Rather, they are proprietorship and partnership firms.

They dominate the fastest growing activities of the service sector, namely trade, transport, restaurants and construction. The share of households in the national economy is very significant more than 90 per cent.

Of this, only around five per cent is invested in bonds and shares. The largest saving avenues are banking deposits, small savings, insurance and provident fund. The stock market is important to 10 per cent of the economy and it cannot be categorised as the barometer of the economy. In that case, how do we assess growth in the economy?

Quite simply, peep out the window. If there is a lot of construction activity going on, many trucks plying on the roads, and plenty of food joints and retail outlets, then you know that economic activity is increasing.

Stock market: Barometer of economy? | Business Line

The author is professor of finance and control, IIM-B. Feedback may be sent to vaidya iimb. The views are personal.

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This article was published in the Business Line print edition dated March 24, Related TOPICS Columns Insight economy, business and finance economy general stocks and shares ul.

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