The Indian Share Market & Real GDP Relationship..!
From SEBI Investor Survey 2015 (SIS 2015)
Significant component of the SIS 2015 is to collect and
analyse data on investor perceptions and sentiments. To gauge the relationship
between stock markets and economic growth, especially whether a growth in stock
markets directly translates to a growth in the economy and to figure out
whether sentiments and confidence correspondingly leads to a growth of the
markets or the economy, the correlation between a broad equities market index
(in this case, the Sensex) and the real GDP growth of the economy is essential.
US Federal Reserve Bank’s Maria Ward Otoo 21 attempts to
answer a more profound chicken-egg question vis-Ã -vis the relation between
markets and growth. Her paper’s abstract asks a crucial question: “Does an
increase in stock prices raise aggregate sentiment because people are wealthier
or because they use movements in stock prices as an indicator of future
economic activity and potential labour income growth 21?” While Otoo eventually
concludes that a rise in stock prices leads to the well-documented “wealth
effect” amongst investors, she also finds that people use equity price
movements as a leading indicator of economic and wage growth.
Figure 2.6 establishes that benchmark index Sensex and
GDP are positively correlated and index performance is used an indicator to
guage the real GDP growth rates. This is a global phenomenon that is not
limited to the Indian scenario. Stock markets’ performance is also a crucial component
in the Conference Board Leading Indicators series, which is used by economists
and securities markets professionals across the globe.
Although Figure 2.6 confirms the relationship between
stock markets (which is often driven by sentiments and expectations) and the
real economy, it does not verify the direct effect of sentiments on the real
economy.
On the other hand, Figure 2.7 uses data from the Consumer
Confidence Index series (current and future expectations series) from the
Reserve Bank of India (RBI) Surveys and data on growth of personal consumption
expenditure of Indian households to showcase the effects of sentiment on actual
consumption expenditure.
According to Figure 2.7, a deteriorating confidence in
2012 led to significantly lower growth in personal consumption expenditure in
that year whereas a rise in confidence in 2013 was visible in the actual
consumption data of the same year.
Looking at 2014’s data, it is obvious that since the
current and future expectations from the economy are on the rise, the growth
rates in India reflecting this confidence are on the upswing too (7% in the
last quarter).
From King and Levine’s (1993)23 seminal paper to the
IMF’s24 recent, extensive research, the relationship between the development of
financial systems and its effect on economic growth are gradually becoming
recognized by academic researchers and policy makers across the globe.
The vast research on behavioural economics (for which the
psychologist Daniel Kahneman won the Nobel Memorial Prize in Economics)
unmistakably demonstrates that individual psychology (driven habitually by its
biases and mental shortcuts) primarily drives the growth of securities markets.
Thus, it is imperative for regulators and governments to
initiate measures for deepning and broadening of the securities market which
will contribute to the economic growth .
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