Research Report On Comparative Study of Stock Market Development and Economic Growth Pre and Post Liberalization of Indian Economy

“COMPARATIVE STUDY OF STOCK MARKET DEVELOPMENT AND 2010
ECONOMIC GROWTH,PRE AND POST LIBERALISATION OF

INDIAN ECONOMY”
A RESEARCH REPORT ON
“COMPARATIVE STUDY OF STOCK MARKET
DEVELOPMENT AND INDIAN ECONOMY”
“PRE AND POST LIBERALIZATION OF INDIAN
ECONOMY”
SUBMITTED TO
INSTITUTE OF PROFESSIONAL EXCELLENCE AND

MANAGEMENT, GHAZIABAD
SESSION 2008-10
SUBMITTED BY
Mr.JITENDRA SINGH
Roll No - 0811470030
M.B.A. 2ND YEAR
I.P.E.M., GHAZIABAD
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INSTITUTE OF PROFESSIONAL EXCELLENCE AND MANAGEMENT

A-13/1,S.S.INDUSTRIAL AREA
N.H.-24, GHAZIABAD- 201009
ACKNOWLEDGEMENT
I would like to express my Acknowledgement to those people, without whose contribution,
Support and guidance this Report would not have seen the light of the day. Notable among
them is Dr.B.S. Sarin H.O.D. (MBA), IPEM, Ghaziabad. Who was my Project Guide and
who helped me in a lot?
I am also thankful and would like to express my Gratitude to the Honorable Director Col.
A.S.Malhotra and the entire Institute for giving me a platform to have this wonderful
opportunity and being able to get a glimpse of the Corporate Word.
I am also thankful to Dr. Chhaya Tyagi (Sr. Lecturer M.B.A.)
for their constant Support and valuable suggestion.
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With Regards
Mr. JITENDRA SIGNH
M.B.A.-0811470030
PREFACE
As a Part of M.B.A. Program, Student has to pursue a Research Project duly approved by
the Faculty of Concerned area. I had the privilege of undertaking the Research project on
“Comparative Study of Capital Market Development and Indian Economy, Pre and
Post Liberalization of Indian Economy”. Main aim of the Project is to study how stock
market and Indian economy are correlated to each other.
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DECLERATION
I Jitendra Singh, Student of MBA II Year, Institute of Professional Excellence and
Management, Hereby declare that the project on “Comparative Study of Capital Market
Development And Economic Growth, Pre And Post Liberalization Of Indian Economy”
has been done under the guidance of Dr. B.S. Sarin (HOD, MBA), Institute of Professional
Excellence and Management Studies & Dr. Chhaya Tyagi( Sr. lecturer MBA
IPEM,Ghaizabad).
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JITENDRA SINGH
ROLL NO.-
0811470030
MBA 2008-10
IPEM GHAZIABAD
CONTENTS
List of Tables
TOPIC PAGE NO
1. TITLE PAGE 1
2.ACKNOWLEDGEMENT 2
3. PREFACE 3
4. DECLEARATION 4
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5. INTRODUCTION AND HISTORY
STOCK MARKET 5-20
INDIAN ECONOMY 21-39
6. OBJECTIVES 40-41
7. SCOPE OF THE STUDY 42-43
8. USE AND IMPORTANCE OF THE TOPIC 44-46
9. RESEARCH METHODOLOGY 47-50
10. ANALYSIS OF DATA 51-61
11. FINDINGS 62-64
12. CONCLUSION 65-66
13. RECOMMENDATION 67-68
14 .LIMITATION 69-71
15.ANNEXURE 71-76
16.BIBLIOGRAPHY 77-78
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STOCK MARKET OF INDIA
Introduction Stock markets refer to a market place where investors can buy and sell
stocks. The price at which each buying and selling transaction takes is determined by the
market forces (i.e. demand and supply for a particular stock).
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Let us take an example for a better understanding of how market forces determine stock
prices. ABC Co. Ltd. enjoys high investor confidence and there is an anticipation of an
upward movement in its stock price. More and more people would want to buy this stock (i.e.
high demand) and very few people will want to sell this stock at current market price (i.e. less
supply). Therefore, buyers will have to bid a higher price for this stock to match the ask price
from the seller which will increase the stock price of ABC Co. Ltd. On the contrary, if there
are more sellers than buyers (i.e. high supply and low demand) for the stock of ABC Co. Ltd.
in the market, its price will fall down.
In earlier times, buyers and sellers used to assemble at stock exchanges to make a transaction
but now with the dawn of IT, most of the operations are done electronically and the stock
markets have become almost paperless. Now investors’ don’t have to gather at the
Exchanges, and can trade freely from their home or office over the phone or through Internet.
CONCEPT OF STOCK EXCHANGE

The Securities Contracts (Regulation) Act, 1956, has defined Stock Exchange as an
"association, organization or body of individuals, whether incorporated or not, established for
the purpose of assisting, regulating and controlling business of buying, selling and dealing in
Securities".
Stock exchange as an organized security market provides marketability and price continuity
for shares and helps in a fair evaluation of securities in terms of their intrinsic worth. Thus it
helps orderly flow and distribution of savings between different types of investments. This
institution performs an important part in the economic life of a country, acting as a free
market for securities where prices are determined by the forces of supply and demand. Apart
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from the above basic function it also assists in mobilizing funds for the Government and the
Industry and to supply a channel for the investment of savings in the performance of its
functions.
The Stock Exchanges in India as elsewhere have a vital role to play in the development of the
country in general and industrial growth of companies in the private sector in particular and
helps the Government to raise internal resources for the implementation of various
development programmes in the public sector. As a segment of the capital market it performs
an important function in mobilizing and channelizing resources which remain otherwise
scattered. Thus the Stock Exchanges tap the new resources and stimulate a broad based
investment in the capital structure of industries.
A well developed and healthy stock exchange can be and should be an important institution
in building up a property base along with a socialist in India with broader distribution of
wealth and income. Thus Stock Exchange is a vital organ in a modern society. Without a
stock exchange a modern democratic economy cannot exist. The system of joint stock
companies financed through the public investment as emerged has put the vast means of
finances almost to entrepreneur’s needs. Indian
Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
The earliest records of security dealings in India are meager and obscure. The East India
Company was the dominant institution in those days and business in its loan securities used
to be transacted towards the close of the eighteenth century.
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By 1830's business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850.
The 1850's witnessed a rapid development of commercial enterprise and brokerage business
attracted many men into the field and by 1860 the number of brokers increased into 60.
In 1860-61 the American Civil War broke out and cotton supply from United States of
Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers increased
to about 200 to 250. However, at the end of the American Civil War, in 1865, a disastrous
slump began (for example, Bank of Bombay Share which had touched Rs 2850 could only be
sold at Rs. 87).
At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,
found a place in a street (now appropriately called as Dalal Street) where they would
conveniently assemble and transact business. In 1887, they formally established in Bombay,
the "Native Share and Stock Brokers' Association" (which is alternatively known as “The
Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same street and it
was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.
Other leading cities in stock market operations
Ahmedabad gained importance next to Bombay with respect to cotton textile industry. After
1880, many mills originated from Ahmedabad and rapidly forged ahead. As new mills were
floated, the need for a Stock Exchange at Ahmedabad was realized and in 1894 the brokers
formed "The Ahmedabad Share and Stock Brokers' Association".
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What the cotton textile industry was to Bombay and Ahmedabad, the jute industry was to
Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.
After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares, which
was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom between
1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock Exchange
Association".
In the beginning of the twentieth century, the industrial revolution was on the way in India
with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel Company
Limited in 1907, an important stage in industrial advancement under Indian enterprise was
reached.
Indian cotton and jute textiles, steel, sugar, paper and flour mills and all companies generally
enjoyed phenomenal prosperity, due to the First World War.
In 1920, the then demure city of Madras had the maiden thrill of a stock exchange
functioning in its midst, under the name and style of "The Madras Stock Exchange" with 100
members. However, when boom faded, the number of members stood reduced from 100 to 3,
by 1923, and so it went out of existence.
In 1935, the stock market activity improved, especially in South India where there was a
rapid increase in the number of textile mills and many plantation companies were floated. In
1937, a stock exchange was once again organized in Madras - Madras Stock Exchange
Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange
Limited).
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Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the
Punjab Stock Exchange Limited, which was incorporated in 1936.
Existing structure of the stock exchanges in India
The Act recognizes stock exchanges with different legal structure. Presently the stock
exchanges which are recognized under the Securities Contracts (Regulation) Act in India
could be segregated into two broad groups – 20 stock exchanges which were set up as
companies, either limited by guarantees or by shares, and the 3 stock exchanges which are
functioning as associations of persons (AOP) viz. BSE, Ahmedabad Stock Exchange and
Indore Stock Exchange. The 20 stock exchanges which are companies are: the stock
exchanges of Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati,
Hyderabad, Interconnected SE, Jaipur, Ludhiana, Madras, Magadh, Managalore, NSE, Pune,
OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Of these, the stock exchanges of
Ahmedabad, Bangalore, BSE, Calcutta, Delhi, Hyderabad, Madhya Pradesh, Madras and
Gauhati were given permanent recognition by the Central Government at the time of setting
up of these stock exchanges. Apart from NSE, all stock exchanges whether established as
corporate bodies or Association of Persons (AOPs), are non-profit making organizations.
Powers that may be exercised by the Stock Exchange
The powers of the stock exchange are to be exercised as per provisions in its bye-law. As per
SCRA Act any recognised stock exchange may, subject to the previous approval of the
[Securities and Exchange Board of India make bye-laws for the regulation and control of
contracts. The bye-laws can provide for the exercise of following powers by the stock
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exchange
a. The opening and closing of markets and the regulation of the hours of trade;
b. Set up a clearing house for the periodical settlement of contracts and differences there
under, the delivery of and payment for securities, the passing on of delivery orders and the
regulation and maintenance of such clearing house;
c. The regulation or prohibition of blank transfers;
d. The regulation, or prohibition of badlas or carry-over facilities;
e. The fixing, altering or postponing of days for settlements;
f. The determination and declaration of market rates, including the opening, closing, highest
and lowest rates for securities;
g. The terms, conditions and incidents of contracts, including the prescription of margin
requirements, if any, and conditions relating thereto, and the forms of contracts in writing;
h. The regulation of the entering into, making, performance, rescission and termination, of
contracts, including contracts between members or between a member and his constituent or
between a member and a person who is not a member, and the consequences of default or
insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or
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omission by a seller or buyer, and the responsibility of members who are not parties to such
contracts;
I. The regulation of taravani business including the placing of limitations thereon;
j. The listing of securities on the stock exchange, the inclusion of any security for the purpose
of dealings and the suspension or withdrawal of any such securities, and the suspension or
prohibition of trading in any specified securities;
k. The method and procedure for the settlement of claims or disputes, including settlement by
arbitration;
l. The levy and recovery of fees, fines and penalties
m. The regulation of the course of business between parties to contracts in any capacity;
n. The exercise of powers in emergencies in trade (which may arise, whether as a result of
pool or syndicated operations or cornering or otherwise) including the power to fix maximum
and minimum prices for securities;
o. The regulation of dealings by members for their own account;
p. The separation of the functions of jobbers and brokers;
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q. The limitations on the volume of trade done by any individual member in exceptional
circumstances;
r. Fixing the obligation of members to supply such information or explanation and to produce
such documents relating to the business as the governing body may require.
Indian Stock Exchanges - An Umbrella Growth
The Second World War broke out in 1939. It gave a sharp boom which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized as a
supply base.
On account of the restrictive controls on cotton, bullion, seeds and other commodities, those
dealing in them found in the stock market as the only outlet for their activities. They were
anxious to join the trade and their number was swelled by numerous others. Many new
associations were constituted for the purpose and Stock Exchanges in all parts of the country
were floated.
The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited (1940)
and Hyderabad Stock Exchange Limited (1944) were incorporated.
In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and the
Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,
amalgamated into the Delhi Stock Exchanges Association Limited.
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History of the Indian Stock Market - The Origin
One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years old
history.
18th East India Company was the dominant institution and by end of the century,
Century business in its loan securities gained full momentum
1830's Business on corporate stocks and shares in Bank and Cotton presses started in
Bombay. Trading list by the end of 1839 got broader
1840's Recognition from banks and merchants to about half a dozen brokers
1850's Rapid development of commercial enterprise saw brokerage business
attracting more people into the business
1860's The number of brokers increased to 60
1860-61 The American Civil War broke out which caused a stoppage of cotton supply
from United States of America; marking the beginning of the "Share Mania"
in India
1862-63 The number of brokers increased to about 200 to 250
1865 A disastrous slump began at the end of the American Civil War (as an
example, Bank of Bombay Share which had touched Rs. 2850 could only be
sold at Rs. 87)
Pre-Independence Scenario - Establishment of Different Stock Exchanges
1874 With the rapidly developing share trading business, brokers used to
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gather at a street (now well known as "Dalal Street") for the purpose of
transacting business.
1875 "The Native Share and Stock Brokers' Association" (also known as "The
Bombay Stock Exchange") was established in Bombay
1880's Development of cotton mills industry and set up of many others
1894 Establishment of "The Ahmedabad Share and Stock Brokers'
Association"
1880 - Sharp increase in share prices of jute industries in 1870's was followed
90's by a boom in tea stocks and coal
1908 "The Calcutta Stock Exchange Association" was formed
1920 Madras witnessed boom and business at "The Madras Stock Exchange"
was transacted with 100 brokers.
1923 When recession followed, number of brokers came down to 3 and the
Exchange was closed down
1934 Establishment of the Lahore Stock Exchange
1936 Merger of the Lahoe Stock Exchange with the Punjab Stock Exchange
1937 Re-organization and set up of the Madras Stock Exchange Limited (Pvt.)
Limited led by improvement in stock market activities in South India
with establishment of new textile mills and plantation companies
1940 Uttar Pradesh Stock Exchange Limited and Nagpur Stock Exchange
Limited was established
1944 Establishment of "The Hyderabad Stock Exchange Limited"
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1947 "Delhi Stock and Share Brokers' Association Limited" and "The Delhi
Stocks and Shares Exchange Limited" were established and later on
merged into "The Delhi Stock Exchange Association Limited"
POST INDEPENDENCE SCENARIO
The depression witnessed after the Independence led to closure of a lot of exchanges in the
country. Lahore stock Exchange was closed down after the partition of India, and later on
merged with the Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in
1957 and got recognition only by 1963. Most of the other Exchanges were in a miserable
state till 1957 when they applied for recognition under Securities Contracts (Regulations)
Act, 1956. Most of the exchanges suffered almost a total eclipse during depression. Lahore
Exchange was closed during partition of the country and later migrated to Delhi and merged
with Delhi Stock Exchange. Bangalore Stock Exchange Limited was registered in 1957 and
recognized in 1963.
Most of the other exchanges languished till 1957 when they applied to the Central
Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only
Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad and Indore, the well established
exchanges, were recognized under the Act. Some of the members of the other Associations
were required to be admitted by the recognized stock exchanges on a concessional basis, but
acting on the principle of unitary control, all these pseudo stock exchanges were refused
recognition by the Government of India and they thereupon ceased to function.
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Thus, during early sixties there were eight recognized stock exchanges in India (mentioned
above). The number virtually remained unchanged, for nearly two decades. During eighties,
however, many stock exchanges were established: Cochin Stock Exchange (1980), Uttar
Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune Stock Exchange
Limited (1982), Ludhiana Stock Exchange Association Limited (1983), Gauhati Stock
Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore, 1985), Magadh
Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange Limited (1989),
Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra Kutch Stock
Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at Baroda, 1990)
and recently established exchanges - Coimbatore and Meerut. Thus, at present, there are
totally twenty one recognized stock exchanges in India excluding the Over the Counter
Exchange of India Limited (OTCEI) and the National Stock Exchange of India Limited
(NSEIL).
Government policies during 1980's also played a vital role in the development of the Indian
Stock Markets.
POST –REFORMS STOCK MARKET SCENARIO
After the initiation of reforms in 1991, the Indian secondary market now has a three –tier
form.
• Regional stock exchange
• National stock exchange (NSE)
• Over the Exchange of India (OTCEI)
The NSE was set up in 1994 .It was the first modern stock exchange to bring in new
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technology , new trading practices , new institutions , and new products.
The OTCEI was set up in 1992 as a stock exchange providing small and medium sized
companies the means to generate capital.
In all, there are at present, 23 stock exchange in India –19 regional stock exchanges, BSE,
NSE, OTCEI, and the interconnected stock exchange of India (ISE)
The 19 regional stock exchanges are located at Ahmedabad, Bangalore, Bhubaneswar,
Kolkata, Cochin, Coimbatore, Delhi, Guwahati, Hydrabad, Indore, Jaipur, Kanpur, Ludhiana,
Chennai, Mangalore, Pune, Patna, Rajkot, and Vadodara. They operate under the rules, by
laws and regulations approved by the government and SEBI.
REFORMS IN INDIAN CAPITAL MARKET

The 1991_92 securities scam prompted the government to increases the pace of reforms in
the capital market. Several measures have been undertaken since then in both the primary and
secondary market.
Primary market reforms: Security exchange Board of India was set up in early 1988 as a non
statutory body was given power in January 1992.The two objective mandated in the SEBI act
are investor protection and orderly development of the capital market.
• The SEBI has introduced various guidelines and regulatory measures for capital market in
India. The issuing company is required to make material disclosure about the risk factors, in
their offer document and also to get their debt instrument rated.
• The infrastructure of the primary capital market has been fairly diversified over the years
with the setting up of a large number of merchant bankers, investment and consulting
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agencies registrars to the issue and so on.
• The primary capital market has widened and deepened with public sector banks , financial
institutions , and public sector enterprises in
• Three new stock exchange at the national level were set up in the1990s. There are over the
counter Exchange of India (1992), National stock Exchange of India (1994), and Inter –
connected the infrastructure and power sectors increasingly raising resources from the market
both way of debt and equity.
• Companies are now required to disclose all materials fact and specific risk factor associated
with their project while making public issue process.
• SEBI has also introduced a code of advertisement for public issues for ensuring fair and true
picture.
• In order to reduce the cost of issue, the underwriting issue has been made optional subject to
the condition that if the subscription is less than 90% of the amount offered, the entire
amount collected would be refunded to the investor.
Secondary market reforms:
• The open outcry trading system, prevalent till 1995, was replaced by the online screen based
trading system (SBTS). In all 23 stock exchanges have approximately 8000, trading terminals
spread all over the country. Stock Exchange of India (1999).
• Trading and settlement cycle were uniformly trimmed from 14 days to 7days in all stock
exchanges in Aug 1996.
• The settlement cycle for all securities was shorted from T+5 to T+3 days with effect from
April 1, 2002.
• With a view to maintaining integrity and ensuring safety of the market, various risk
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containment measures have been initiated such as the mark to mark margin system, intra –
day trading limit, exposure limit, and setting up of trade / settlement guarantee fund.
• To enhance the level of investor protection, the process of dematerialization of securities
through the depository system and their transfer through electronic book entry is pursued
vigorously. For this purpose National Securities Depository Limited and central Depository
service was set up.
• Issuing company is required to make continuing disclosure under the listing agreement.
• One of the major reforms in the secondary market is the measure to improve corporate
governance .this is a set of system and process designed to protect the interest of stake
holders.
• The insider trading regulations have been formulated prohibiting insider trading and making
it a criminal offence, punishable in accordance with the provision under the SEBI Act, 1992.
• In February 1999, trading terminal was allowed to be set up abroad for facilitating market
participation by nonresidents. Internet trading was permitted in February 2000.
How do the debt markets impact the economy?
1. Increased funds for implementation of government development plans. The government

can raise funds at lower costs by issuing government securities.
2. Conducive to implementation of a monetary policy.
3. Less risk compared to the equity markets, encouraging low-risk investments. This leads
to inflow of funds into the economy.
4. Higher liquidity and control over credit.
5. Opportunity for investors to diversify their investment portfolio.
6. Better corporate governance.
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7. Improved transparency because of stringent disclosure norms and auditing requirements.
INTRODUCTION OF INDIAN ECONOMY

PRE LIBERALISED ECONOMY
Early Indian Economy

Indian economy in the early period was a self sufficient economy comprising of several
villages. Indian villages produced and met their requirement according to division of labour
and their economic activity was restricted to village economy. Barter system prevailed as an
exchange mechanism. Basically, the primary activity was agriculture. Other services like
carpentry, weaving, hair dressing, etc. were offered by labourers who extended their services
based on hereditary. They received their wages as food products. In short, Indian villages
functioned as an independent republics and the only interference was from the King for
whom they paid taxes in kind. Thus, India had happy villages.
Prior to the British rule, religion, system of the society and king’s law influenced the
economy to a great extent. There prevailed caste system which decided the division of labour
for the benefit of the society’s economy. Further, the prevalence of joint-family system
helped them to pool their resources for their individual family benefit and also for the benefit
of the society. Another advantage of the joint-family system was that the cultivable lands
were not fragmented, yielding to better economic gains.
Another influencer of early Indian economy was the Hindu religion. The religious canters
also functioned as Indian trade centers. For example, major pilgrimage spots like Nasik,
Allahabad, Varanasi, etc. also functioned as centers of commerce and trade. Many trade and
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commerce activities were linked to the religious festivals and functions. In short, the Hindu
religion acted as an indirect catalyst for the Indian economy.
One of the major industries in early India was textile. Handicrafts were also part of the Indian
industrial activity. Indian textile products like shawls, dhotis, dopattas, woolen products,
cotton goods, etc. and handicraft products were exported to overseas markets, such as Egypt,
South East Asia, Greece, etc. It is worth noting that when Europe (birth place of modern
industrialism) was inhabited by uncivilized people, India was very popular for its
craftsmanship and rich economy.
Indian Economy during Colonialism
Indian land had been invaded and ruled by many outsiders, amongst which the British regime
was considered very important. British East India Company entered India in 1757 through the
Battle of Plessey and the Crown took the complete administration during 1858. Politically,
India was under the British rule for around two centuries and the Indian economy was
significantly influenced during their rule. Indian culture and administration too underwent a
major transition during British rule.
PRE-LIBERALIZATION POLICIES
Indian economic policy after independence was influenced by the colonial experience (which
was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian
socialism. Policy tended towards protectionism, with a strong emphasis on import
substitution, industrialization, state intervention in labor and financial markets, a large public
sector, business regulation, and central planning. Five-Year Plans of India resembled central
planning in the Soviet Union. Steel, mining, machine tools, water, telecommunications,
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insurance, and electrical plants, among other industries, were effectively nationalized in the
mid-1950s. Elaborate licences, regulations and the accompanying red tape, commonly
referred to as Licence Raj, were required to set up business in India between 1947 and 1990.
Before the process of reform began in 1991, the government attempted to close the Indian
economy to the outside world. The Indian currency, the rupee, was inconvertible and high
tariffs and import licensing prevented foreign goods reaching the market. India also operated
a system of central planning for the economy, in which firms required licenses to invest and
develop. The labyrinthine bureaucracy often led to absurd restrictions — up to 80 agencies
had to be satisfied before a firm could be granted a licence to produce and the state would
decide what was produced, how much, at what price and what sources of capital were used.
The government also prevented firms from lying off workers or closing factories. The central
pillar of the policy was import substitution, the belief that India needed to rely on internal
markets for development, not international trade — a belief generated by a mixture of
socialism and the experience of colonial exploitation. Planning and the state, rather than
markets, would determine how much investment was needed in which sectors.
IMPACTS
➢ The low annual growth rate of the economy of India before 1980, which stagnated
around 3.5% from 1950s to 1980s, while per capita income averaged 1.3%. At the
same time, Pakistan grew by 5%, Indonesia by 9%, Thailand by 9%, South Korea by
10% and in Taiwan by 12%.
➢ Only four or five licences would be given for steel, power and communications.
License owners built up huge powerful empires.
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➢ A huge public sector emerged. State-owned enterprises made large losses.
➢ Infrastructure investment was poor because of the public sector monopoly.
➢ License Raj established the "irresponsible, self-perpetuating bureaucracy that still
exists throughout much of the country" and corruption flourished under this system.
Rajiv Gandhi government (1984-1989)
➢ Government in the 80s, the government led by Rajiv Gandhi started light reforms. The
slightly reduced License Raj and also promoted the growth of the telecommunications
and software industries.
➢ The Vishwanath Pratap Singh government (1989–1990) and Chandra Shekhar
government (1990–1991) did not add any significant reforms.
Narasimha Rao government (1991-1996)
Crisis
The assassination of Prime minister Indira Gandhi in 1984, and later of her son Rajiv Gandhi
in 1991 crushed international investor confidence on the economy that was eventually pushed
to the brink by the early 1990s.
As of 1991, India still had a fixed exchange rate system, where the rupee was pegged to the
value of a basket of currencies of major trading partners. India started having balance of
payments problems since 1985, and by the end of 1990, it was in a serious economic crisis.
The government was close to default, its central bank had refused new credit and foreign
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exchange reserves had reduced to the point that India could barely finance three weeks’
worth of imports.
A Balance of Payments crisis in 1991 pushed the country to near bankruptcy. In return for an
IMF bailout, gold was transferred to London as collateral, the Rupee devalued and economic
reforms were forced upon India. That low point was the catalyst required to transform the
economy through badly needed reforms to unshackle the economy. Controls started to be
dismantled, tariffs, duties and taxes progressively lowered, state monopolies broken, the
economy was opened to trade and investment, private sector enterprise and competition were
encouraged and globalization was slowly embraced. The reforms process continues today and
is accepted by all political parties, but the speed is often held hostage by coalition politics and
vested interests.
Reforms
The Government of India headed by Narasimha Rao decided to usher in several reforms that
are collectively termed as liberalization in the Indian media. Narasimha Rao appointed
Manmohan Singh as a special economical advisor to implement liberalization.
The reforms progressed furthest in the areas of opening up to foreign investment, reforming
capital markets, deregulating domestic business, and reforming the trade regime.
Liberalization has done away with the Licence Raj (investment, industrial and import
licensing) and ended many public monopolies, allowing automatic approval of foreign direct
investment in many sectors. Rao's government's goals were reducing the fiscal deficit,
privatization of the public sector, and increasing investment in infrastructure. Trade reforms
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and changes in the regulation of foreign direct investment were introduced to open India to
foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an
acclaimed economist, played a central role in implementing these reforms. New research
suggests that the scope and pattern of these reforms in India's foreign investment and external
trade sectors followed the Chinese experience with external economic reforms.
➢ In the industrial sector, industrial licensing was cut, leaving only 18 industries subject to
licensing. Industrial regulation was rationalized.
➢ Abolishing in 1992 the Controller of Capital Issues which decided the prices and number
of shares that firms could issue.
➢ Introducing the SEBI Act of 1992 and the Security Laws (Amendment) which gave
SEBI the legal authority to register and regulate all security market intermediaries.
➢ Starting in 1994 of the National Stock Exchange as a computer-based trading system
which served as an instrument to leverage reforms of India's other stock exchanges. The
NSE emerged as India's largest exchange by 1996.
➢ Reducing tariffs from an average of 85 percent to 25 percent, and rolling back
quantitative controls. (The rupee was made convertible on trade account.) Encouraging
foreign direct investment by increasing the maximum limit on share of foreign capital in
joint ventures from 40 to 51 percent with 100 percent foreign equity permitted in priority
sectors.
➢ Streamlining procedures for FDI approvals, and in at least 35 industries, automatically
approving projects within the limits for foreign participation. Opening up in 1992 of
India's equity markets to investment by foreign institutional investors and permitting
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Indian firms to raise capital on international markets by issuing Global Depository
Receipts (GDRs).
➢ Marginal tax rates were reduced.
➢ Privatization of large, inefficient and loss-inducing government corporations was
initiated.
LATER REFORMS
➢ Atal Bihari Vajpayee's administration surprised many by continuing reforms, when it was
at the helm of affairs of India for five years.
➢ The Vajpayee administration continued with privatization, reduction of taxes, a sound
fiscal policy aimed at reducing deficits and debts and increased initiatives for public
works.
➢ The UF government attempted a progressive budget that encouraged reforms, but the
1997 Asian financial crisis and political instability created economic stagnation.
➢ Right to Information Act (2005)
➢ Indo-US civilian nuclear agreement (2008)
➢ Right to Education Bill (2008)
Impact of reforms
The impact of these reforms may be gauged from the fact that total foreign investment
(including foreign direct investment, portfolio investment, and investment raised on
international capital markets) in India grew from a minuscule US $132 million in 1991-92 to
$5.3 billion in 1995-96.
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Cities like Gurgaon, Bangalore, Hyderabad, Pune and Ahmedabad have risen in prominence
and economic importance, became centres of rising industries and destination for foreign
investment and firms.
Policy tended towards protectionism, with a strong emphasis on import substitution,
industrialization, state intervention in labor and financial markets, a large public sector,
business regulation, and central planning. Five-Year Plans of India resembled central
Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta Chandra
Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic policy. They
expected favorable outcomes from this strategy, because it involved both public and private
sectors and was based on direct and indirect state intervention, rather than the more extreme
Soviet-style central command system... The policy of concentrating simultaneously on
capital- and technology-intensive heavy industry and subsidizing manual, low-skill cottage
industries was criticized by economist Milton Friedman, who thought it would waste capital
and labour, and retard the development of small manufacturers. The rate from 1947–80 was
derisively referred to as the Hindu rate of growth, because of the unfavorable comparison
with growth rates in other Asian countries, especially the "East Asian Tigers".
The Rockefeller Foundation's research in high-yielding varieties of seeds, their introduction
after 1965 and the increased use of fertilizers and irrigation are known collectively as the
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Green Revolution in India, which provided the increase in production needed to make India
self-sufficient in food grains, thus improving agriculture in India. Famine in India, once
accepted as inevitable, has not returned since the end of colonialism.
It is paradoxical that India is a rich country (in terms of enormous natural and man power
resources) with poor people. India adopts a mixed economic model which is tending towards
economic liberalization in order to attain self-reliance.
Indian economy is characterized by lower per capita income, mass unemployment and under
employment, over-dependence of agriculture, over population, poor standard of living, low
level of capital formation, low levels of health and education facilities, etc. Indian population,
instead of being an asset, has most often proved to be a liability and economic distress. This
calls for more attention by the Government in the upliftment of the population. Thus, any
economic policy treatment in India will be viewed with a social mind frame.
During 1901, urban population which was at 10.8 per cent of total population has increased to
25.7 per cent during 1991. Further, almost the entire rural population of 1901 (213 million)
lives in urban India during 1991 (218 million). This indicates the extent of migration.
Savings and capital formation are very important for a country’sonomic development. The
gross domestic savings which was at Rs 2544 crore in 1960-61 rose to Rs 157186 crore in
1992-93. The contribution of household sector to savings is the largest in India, followed by
public sector and private corporate sector. The rate of saving s in India to GDP is not
satisfactory due to several reasons, such as, low per capita income, poor performance of
public sector enterprises, poor contribution of private sector players and untapped rural
savings potential.
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It is worth noting that the gross savings of corporate sector, for the period 1960-61 to 1992-
93, indicates an annual average growth rate of 14.23 per cent. However, when the savings
and capital formation in the private corporate sector are compared with the gross domestic
savings and capital formation, it has remained at more or less the same proportion around
one-eighth of the total domestic savings. This is an indication of the corporate sector’s
dependence on household sector savings for its long term capital requirements, which has led
to a broad based structure of share ownership pattern.
Indian economy has come a long way, especially after independence. Since independence,
the structure of the Indian economy has gone through several changes, out of which sectoral
contribution to the economy is the most vital one. The agricultural contribution to GDP is
declining gradually as seen in the Table below. While the contribution of industrial sector has
not improved to a great extend, the service sector’s contribution to GDP has notably
increased. One of the main reasons for this change can be attributed to the economic policies
of India.
Sectoral Share in National Income

(figures in percentage)
1970-71 1995-96
Agriculture 50 29
Industry 20 28
Service 30 43
It has to be noted that though the contribution of agriculture to GDP has declined, still
majority of the population (around 67 per cent as per 1991 census) is depend on primary
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sector. This is the reason for the failure of many multinationals in India. They fail to notice
this fact and over estimated the demand potential of their products.
SINCE 1991
Major improvements in educational standards across India have helped its economic rise.
Shown here is the Indian School of Business at Hyderabad, ranked number 15 in global MBA
rankings by the Financial Times of London in 2009.
In the late 80s, the government led by Rajiv Gandhi eased restrictions on capacity expansion
for incumbents, removed price controls and reduced corporate taxes. While this increased the
rate of growth, it also led to high fiscal deficits and a worsening current account. The collapse
of the Soviet Union, which was India's major trading partner, and the first Gulf War, which
caused a spike in oil prices, caused a major balance-of-payments crisis for India, which found
it facing the prospect of defaulting on its loans. India asked for a $1.8 billion bailout loan
from IMF, which in return demanded reforms.
In response, Prime Minister Narasimha Rao along with his finance minister Manmohan Singh
initiated the economic liberalization of 1991. The reforms did away with the Licence Raj
(investment, industrial and import licensing) and ended many public monopolies, allowing
automatic approval of foreign direct investment in many sectors.[55] Since then, the overall
direction of liberalization has remained the same, irrespective of the ruling party, although no
party has tried to take on powerful lobbies such as the trade unions and farmers, or
contentious issues such as reforming labour laws and reducing agricultural subsidies. Since
1990 India has emerged as one of the fastest-growing economies in the developing world;
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during this period, the economy has grown constantly, but with a few major setbacks. This
has been accompanied by increases in life expectancy, literacy rates and food security.
While the credit rating of India was hit by its nuclear tests in 1998, it has been raised to
investment level in 2007 by S&P and Moody's. In 2003, Goldman Sachs predicted that
India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and
Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy
of the world, behind US and China. In 2009 India purchased 200 Tons of Gold for $6.7
Billion from IMF as a total role reversal from 1991.
AGRICULTURE
Agriculture is the back bone of Indian economy for several centuries. The importance of
agriculture in Indian economy is prominently evident. Nearly 70 per cent of the population
depends on agriculture either directly or indirectly for their living.
According to 1991 Census Report, over 67 per cent of the work force is still engaged in
primary sector. However, employment in this sector is not wide spread. In other words, only
0.78 per cent of rural population (or 1.97 per cent of the rural work force) is employed in
allied activities, such as, livestock, forestry, etc. Considering India’s wide natural resource
potential (sea base, animal stock, etc.) this is a very negligible figure. Thus, there can be
found great untapped employment opportunities for rural work force in the allied sector.
Indian agriculture is characterized by lack of technology, low productivity, under employment,
multiplicity of crops, unequal distribution of land, predominance of small farmers, etc.
INDUSTRY
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Industrialization is vital for a country’s economic development. Indian industrial sector is
characterized by under-utilization of resources, low capital formation, low level of
technology, and lack of skilled man power and social attitudes of the population. Indian
industrial development is also highly influenced by the political climate of India, the political
philosophy of the ruling party, the attitude and culture of the political administrators and
Indian Industrial Policies. Indian industry also depends highly on the attitudes and aspirations
of the Indian man power and Indian society.
The economic structure of India follows a mixed economy. Thus, the functioning of duel
sectors - public and private - exists in India. Public sector includes both public utility
undertakings and public enterprises. Due to several factors, such as, low returns, long time
lag, defense requirements, public utilities, large resource requirement, development of
backward regions, development of infrastructure, etc. the Government had to invest in certain
capital-intensive segments to share the burden of industrialization and to generate
employment opportunities. However, most of the public sector undertakings do not perform
well from the angle of profitability and/or efficiency for many reasons, like initial heavy
costs, capital-intensive industries, large capacities, heavy social costs, low priced products,
labour problems and high expense ratio, unprofessional manpower planning, etc.
The role of private sector in Indian industrial development cannot be under stated. Private
sector is also sharing Government’s burden in certain heavy investment ventures today, like
infrastructure. This is due to the improved government policy towards private sector. The
Indian Government has been form time to time changing its industrial policies to suit the
economic and global environment in favour of industrial sector. Further, there can be found a
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trend towards taking advantage of the liberalized industrial policy frame work. This is
vindicated by the various indicators of investment intentions. However, the private sector in
India faces several obstacles: undue delay by the government authorities, restrains on
capacity, over-dependence of public sector, price restrictions, small scale reservations,
finance, etc.
Though private sector is facing many problems, its contribution to Indian economy is
remarkable. For instance, India achieved a GDP growth rate of 7 per cent in 1995-96 for the
first time since 1950, despite a low agricultural growth rate of 2.4 per cent. The major factor
which contributed for this growth rate was achievement by the industrial sector which
registered a growth rate of 12.1 per cent in 1995-96.
SERVICE AND INFRASTRUCTURE SECTOR
For any developing nation development of service and infrastructure segment is very
important to reach its economic goals. India is successful in improving its service and
infrastructure areas. It is very evident that the role of service sector in Indian economic
development has increased by several notches from the fact that this sector which was
contributing only around 20 per cent during independence is contributing over 43 per cent
currently to India’s GDP.
Service and infrastructure sector is comprised of the following segments: Banking, Insurance,
Transport, Telecom and Power.
Banking
Performance of the banking sector is considered as a proxy for the economy as a whole, due
to banks' wide spectrum of exposure across industries. Unfortunately for India, the banking
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sector has historically remained under the impact of non-competitiveness, poor technology
integration, high NPAs and grossly under productive manpower.
Banking sector in India has a wide mix, comprising of joint sector (scheduled and non-
scheduled banks), nationalized sector (Reserve Bank of India, State Bank of India and all
other nationalized commercial banks and post office savings bank), specialized corporate
financial institutions (specific industrial finance corporations and state finance corporations),
co-operative sector (co-operative banks and land development banks) and foreign sector
(foreign commercial banks and exchange banks).
Keeping in mind the socio-economic goals of the country, banks were under strict control of
the regulatory bank - Reserve Bank of India. For instance, during mid-1969, 14 major Indian
commercial banks were nationalized. One of the major criticisms against nationalization of
commercial banks was with respect to efficiency. And the critics were right. Since
nationalization, the operational efficiency of the commercial banks have come down, thanks
to the ‘public-sector working’ attitude of the bank work force. Since, their pay is not linked to
performance; there is no inducement for the banking staff to perform well. This has been
further, deteriorated by the poor quality to man power planning which is linked to selection
of inefficient staff on the basis of social reservations.
Insurance
Insurance sector in India has been enjoying a state-monopoly status in India for decades.
Under Indian conditions there is only two broad classification of insurance companies: life
and non-life insurance. The life insurance activities are solely managed by Life Insurance
Corporation of India and the rest is handled by General Insurance Corporation of India.
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Life insurance business was started in India during British rule. Prior to independence, there
were several insurance companies: Oriental Life Insurance Company, Bombay Life
Assurance, The Madras Equitable Life Insurance Society, Oriental Government Security Life
Assurance Company, etc. Most of the insurance companies were charging a very high extra
premium of 15 to 20 per cent, since they considered Indian lives as sub-standard.
These insurance companies prevailed during the time of independence failed to sustain on a
long term basis. As many as 25 companies were liquidated and another 25 companies had to
merge with other companies at a lost to the policy holders. This has forced the Government
of India in 1956 to nationalize all the 245 life insurance companies (154 Indian and 16
foreign), and form the Life Insurance Corporation of India.
Transport
A well developed transport system will support an economy in several ways : supports the
industry by increasing the efficiency of production, rises the demand through movement of
products, facilitates the location of an industry, helps the development of urbanization,
movement of man power, better standard of living, better education, etc. Contribution of
transport to Indian economy is very significant.
Indian transport sector comprises of all forms of transports: railways, roadways, water and air
transport.
Indian Railways, largest Indian public sector undertaking and largest railway system in Asia
run 12000 trains a day, with over 63000 route kms of track. Indian Railways has around 7000
railway stations. The total distance covered by the 12000 trains every day equals three and
half times the distance to moon. It takes a gigantic task of carrying nearly 11 million
passengers and 1.2 million tons of cargo per day. Indian Railways function as a major
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employment generator in India. Of the 27 million people employed in the organized sector,
Indian Railways accounts for 6 per cent directly and an additional 2.5 per cent indirectly.
Totally about 1.6 million people are employed by Indian Railways.
The importance of road transport to Indian economy cannot be neglected. Road transport is
vital for the movement of agricultural products and also for industrial development. Thus,
roads quicken the rate of growth. Further, road transport functions as a supportive system to
railways. Railways can reach only certain locations, and the rest of the link is taken care by
road transport. At the time of independence India had only 388000 kms of roads. Today,
India has 2178008 km of road length, thanks to planning efforts.
The cheapest mode of transport is water transport, since water-ways provide readymade
routes and thus no infrastructure costs involved in developing journey routes, compared to
railway or road transport. India has both inland water and marine or shipping transport
facilities. India possesses about 14150 kms. Of navigable inland water-ways. Notable Indian
water-ways are: Ganga, Brahmaputra, Godavari, Krishna, Delta Canals, Mondovi, Zuari,
Buckingham Canal and back-waters and the west coast canals of Kerala. Considering the
geographical sea-base benefits of India, there is much scope to improve this mode of
transport in the country, especially the coast line transport.
Telecom
In an economic policy frame work where the role of markets and incentives based on the
price system are emphasized, infrastructural goods and services, such as telecommunications
are generally characterized by high fixed investments, long gestation lags and relatively low
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profits, especially during the initial phases of operation. For a long period, almost all the
infrastructural projects in India were Government’s responsibility.
However, as India moved along the path of economic development, the process of
liberalization began and private sector’s supportive role was recognized. Telecom sector was
opened up for private sector participation into basic services and value added services with
the policy announcement in May 1994. In order to meet the rising demand in the telecom
sector, Indian Government decided to invite private players to supplant the government
supported agencies in rendering basic as well as value added telecom services. Though
opened up, barring a few areas like pagers and mobile phones, Indian telecommunication
sector is dominated by Department of Telecom (DOT) and two government companies -
VSNL and MTNL.
Power
Power is a vital input for the growth of industrial development of any nation - higher the
power, higher the industrial growth and higher the employment. Since independence most of
the projects in this sector has been financed and managed by government agencies -
Center or State (nearly 90 per cent or more investment required for the power sector came
from the public sector through Five Year/Annual Plans). However, since liberalization, the
role of private sector, inclusive of foreign players was recognized in the power projects.
Power projects involve huge investments and overseas support in terms of financing as well
as managing power projects become inevitable for a developing nation like India, since
electricity cannot be easily imported or stored and hence, creation of generation capacity
domestically is critical for meeting the country's demand for power. If the capacity
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additions are not done in time, power shortages result in the system which leads to
inefficient operations and management, decelerate investment in other sectors of the
economy and hamper the growth process of the country in general. In India, the
endemic power shortages and cuts lead to inadequate capacity utilization, unproductive
expenditure such as in back-up generators and much waste, all of which impose a
major constraint on economic growth.
Power Finance
During post-independence era, power - one of the major core sector - has been funded by the
government/government agencies, when private participation was almost nil in power
sector, thanks to government policies. However, with liberalization, this core sector was
opened to private sector and consequently to the foreign players.
Further, due to constraints of funds with the Government of India, the public sector
would suffer from inadequacy of funds. With present levels of finances, only 20000MW
in each plan period could be built in the public sector. Thus, the rest (84000MW) is expected
to be financed through private sector, both Indian and foreign.
Since the cost outlay in power projects are huge, financing the projects through internal
accruals alone becomes inevitable; and further, the government is also slowly changing
withdrawing itself from the role of producer and trying to stick-on only as a regulator in
the long run. Thus, power producers has to look in for alternate source of financing such as,
term loans from financial institutions (internally and internationally) like World Bank,
ADB, ICICI, etc. and debt market in India and abroad.
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Some 70 per cent of the finance required by the power sector over the next decade - total
estimated at about Rs.5000 billion (US $143 billion) - has to be found through debt.
While the sector could expect special consideration in the allocation of foreign debt
entitlement, the bulk of the debt finance will have to be raised in rupees. Identified level of
rupee debt at present is about 75 billion per annum. This would need stepping up
significantly.
The center has decided to allocate about Rs.14000 crore for nuclear energy to generate an
additional 1000MW during the Ninth Plan period. This is an Rs.1000 crore increase over the
Eight Plan period allocation which was Rs.13000 crore. Further, according to the
estimation of Finance Minister, around 22.5 per cent of the proposed voluntary disclosure
scheme for harnessing black money would be used for financing infrastructure projects and
basic minimum services program.
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OBJECTIVE OF THE STUDY
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PRIMARY OBJECTIVE:
➢ To understand the relationship between stock market development and economic
growth in pre and post liberalization of Indian economy.
SECONDARY OBJECTIVE:
➢ To study about the impacts of stock market on Indian economy.
➢ To study about the significant growth of stock market and Indian economy.
➢ To study about the status of capital market and Indian economy in pre and post
liberalized economy of India.
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SCOPE OF THE STUDY
There are following scope of the study:-
➢ Relationship between stock market and Indian economy.
➢ Impact of stock market on the growth of industrial sector of India and vice-versa.
➢ Relationship between stock market and different sectors of Indian economy.
➢ Impact of stock market on gross domestic product (G.D.P.).
Stock market and Indian economy affects each other in significant
way.
So in this study I identified that area of Indian economy which are related with the fluctuation
and variation of stock market.
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IMPORTANCE OF THE TOPIC
There are various significant impacts on the Indian economy and industrial sector. Its
contribution to the economy reflects the importance of the Indian stock market. So there are
following importance of the topic of research paper.
➢ Study of the impact of stock market on Indian economy.
➢ It helps to understand the reflection of the stock market fluctuation on industrial

sectors and their growth.
➢ Study of stock market impact on gross domestic product (GDP).
➢ Help to understand the contribution to the better corporate governance.
➢ It helps to understand the significance impact on the higher liquidity and control over
credit.
➢ Debt markets impact the economy?

• Increased funds for implementation of government development plans. The
government can raise funds at lower costs by issuing government securities.
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• Conducive to implementation of a monetary policy.
• Less risk compared to the equity markets, encouraging low-risk investments. This
leads to inflow of funds into the economy.
• Higher liquidity and control over credit.
• Opportunity for investors to diversify their investment portfolio.
• Better corporate governance.
• Improved transparency because of stringent disclosure norms and auditing

requirements.
There are following use and importance of the topic apart from above points:-
➢ Impacts On Stock Market After Liberalization
➢ Impacts on Indian economy after liberalization
➢ Comparative study of various factors that affects the economy and stock market.
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RESEARCH METHODOLOGY
Research:-
The study of research method provides you with the knowledge and skills you
need to solve the problem and meet the challenges of the fast- based decision.
Marketing environment we define Business Research as a systematic inquiry whose
objective is to provide information to solve managerial problem.
It seeks to find explanation to unexplored phenomena to clarify the doubtful
facts and to correct the misconceived facts.
RESEARCH METHODOLOGY
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Research methodology is the arrangement of conditions for collection and analysis of
data in a manner that aims to combine relevance to the research purpose with
economy in procedure. Research methodology is the conceptual structure within
which research is conducted. It constitutes the blueprint for the collection
measurement and analysis of the data.
Types of Research:
Descriptive Research:
Descriptive study is a fact- finding investigation with adequate interpretation. It
is the simplest type of research. It is more specific than an explanatory study, as it has
focus on particular aspect of the problem studied. It is designed to get her descriptive
information and provide information for formulating more sophisticated studies. Data
are collected by using one or more appropriate method, observation, interviewing and
mail questionnaire.
Type of Data Used:-
There are basically two types of Data
• Primary Data
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• Secondary Data
But here in the research report, I have used only secondary data. Which provides relative data
regarding the research?
Primary Data:-
Primary Data is first hand information that the researcher collects. It helps in collecting
useful and most accurate information that is needed for the researcher to do his research.
Secondary Data:-
Secondary data is what the researcher collects from different sources. It also help
researcher to get elaborate information to do his research.
Sources of Secondary Data:-
• Internet
• Journals
• Data From other organization
Technique used for analysis & interpretation:-
➢ Bar Diagram & Pie Chart
➢ Percentage Analysis
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ANALYSIS OF DATA COLLECTED
There is a saying: stock markets have predicted 10 out of the last 3 recessions.
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With plummeting share prices making headline news, it is worth considering the impact of
the Stock market on the economy. How much should we worry when share prices fall? How
does it impact on the average consumer? And how does it affect the economy?
Economic Effects of Stock Market
1. Wealth Effect
The first impact is that people with shares will see a fall in their wealth. If the fall is
significant it will affect their financial outlook. If they are losing money on shares they will
be more hesitant to spend money; this can contribute to a fall in consumer spending.
However, the effect should not be given too much importance. Often people who buy shares
are prepared to lose money; their spending patterns are usually independent of share prices,
especially for short term losses.
2. Effect on Pensions
Anybody with a private pension or investment trust will be affected by the stock market, at
least indirectly. Pension funds invest a significant part of their funds on the stock market.
Therefore, if there is a serious fall in share prices, it reduces the value of pension funds. This
means that future pension payouts will be lower. If share prices fall too much, pension funds
can struggle to meet their promises. The important thing is the long term movements in the
share prices. If share prices fall for a long time then it will definitely affect pension funds and
future payouts.
3. Confidence
Often share price movements are reflections of what is happening in the economy. E.g. recent
falls are based on fears of a US recession and global slowdown. However, the stock market
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itself can affect consumer confidence. Bad headlines of falling share prices are another factor
which discourages people from spending. On its own it may not have much effect, but
combined with falling house prices, share prices can be a discouraging factor.
4. Investment
Falling share prices can hamper firms’ ability to raise finance on the stock market. Firms who
are expanding and wish to borrow often do so by issuing more shares – it provides a low cost
way of borrowing more money. However, with falling share prices it becomes much more
difficult.
As I said earlier there is an oft repeated quote saying the stock market has predicted 10 out of
the last 3 recessions. The point is that falling stock markets do not necessarily predict the
economic future. Share prices can fall without causing a downturn in the economy. For
example, one thinks of the stock market crashes of October 1987; there wasn’t an obvious
economic factor causing this share price fall. The major economies remained relatively
unaffected by this stock market crash. In fact, the UK had record growth in the late 1980s.
This time the stock market fall is due to economic weaknesses so is a better guide to future
economic performance.
How does the economy affect stock investments?
A stock’s price will go up and down based on what investors think about that individual
company, its industry sector, or its competitors. But the economy can also play a role in stock
prices. Stock prices go up and down in response to:
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• Interest rates: The Bank of Canada can raise or lower interest rates to stabilize or
stimulate the Canadian economy. This is known as monetary policy. If a company
borrows money to expand and improve its business, higher interest rates will affect
the cost of its debt. This can reduce company profits and the dividends it pays
shareholders. As a result, the stock price may drop.
• Economic outlook: If it looks like the economy is going to expand, stock prices
may rise. Why? Investors may buy more stocks thinking they will see future profits
and higher stock prices.
• Inflation: Inflation means higher consumer prices. This often slows sales and
reduces profits. Higher prices will also often lead to higher interest rates. For
example, the Bank of Canada may raise interest rates to slow down inflation. These
changes will tend to bring down stock prices. However, commodities and some
industries and companies can do better with inflation, so their prices may rise.
• Deflation: Here, the cost of goods and services drops. A dollar buys more. Interest
rates rise, so people borrow less. They often wait to buy goods in the hope that
prices will drop more. The Great Depression (1929-1939) was one of the worst
periods of deflation ever.
• Economic shocks: Big changes in the world can affect both the economy and stock
prices. For example, let’s say energy costs rise. This can affect a lot of companies
and consumers and lead to lower sales, lower profits, and lower stock prices.
Another example is an act of terrorism, which can lead to a downturn in economic
activity and a fall in stock prices.
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• Changes of government: A new government can make new policies. Sometimes
these changes can be seen as good for business, and sometimes not. Sometimes
they may lead to changes in inflation and interest rates. These changes may affect
stock prices.
• The value of the Canadian dollar: Many Canadian companies sell products to
buyers in other countries. If the Canadian dollar rises, their customers will have to
spend more to buy Canadian goods. This sometimes drives down sales, which in
turn can lead to lower stock prices. On the other hand, when the price of the
Canadian dollar falls, it makes it cheaper for others to buy our products. This can
make stock prices raise.
Watch these videos of Camilla Sutton, Scotia Capital currency strategist, with Rob Carrick
from the Globe and Mail discussing how you can become your own currency analyst, how
currency affects investment returns and what is driving the Canadian dollar right now.
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In the pre liberalized period the Indian economy is more instable. At that time it become
negative due to various constraint and other factors. There are following two charts which
reflect the pre and post liberalized position of Indian economy. These charts reflects the
variation in economic system through GROSS DOMESTIC PRODUCT ,which more
appropriate measure of Indian economy.
PRE-LIBERALISED PERIOD:
INDEPENDENCE TO 1991
Indian economic policy after independence was influenced by the colonial experience (which
was seen by Indian leaders as exploitative in nature) and by those leaders' exposure to Fabian
socialism. Policy tended towards protectionism, with a strong emphasis on import
substitution, industrialization, state intervention in labor and financial markets, a large public
sector, business regulation, and central planning. Five-Year Plans of India resembled central
➢ Jawaharlal Nehru, the first prime minister, along with the statistician Prasanta
Chandra Mahalanobis, carried on by Indira Gandhi formulated and oversaw economic
policy.
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➢ Indian GDP becomes three times negative before reforms period.
➢ To set up a strong economic system Indian government has taken a steps to reform all
its economic policies under the narsimham committee.
POST REFORM PERIOD:
After the liberalization period the Indian economy shows a positive. Prime Minister
Narasimha Rao along with his finance minister Manmohan Singh initiated the economic
liberalisation of 1991. The reforms did away with the Licence Raj (investment, industrial and
import licensing) and ended many public monopolies, allowing automatic approval of foreign
direct investment in many sectors.[55] Since then, the overall direction of liberalisation has
remained the same, irrespective of the ruling party, although no party has tried to take on
powerful lobbies such as the trade unions and farmers, or contentious issues such as
reforming labour laws and reducing agricultural subsidies.[56] Since 1990 India has emerged
as one of the fastest-growing economies in the developing world; during this period, the
economy has grown constantly, but with a few major setbacks. This has been accompanied
by increases in life expectancy, literacy rates and food security.
Following chart reflects the attitude of GDP after the reforms period.
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Impact of Global Recession on Indian Market

In the globalized market scenario, the impact of recession at one place/ industry/ sector
perculate down to all the linked indusrty and this can be truly interpreated from the current
market situation which is faced by the world since approx 2 month and still the situation is
not in control inspite of various measures taken to fight back the recession in the market.The
badly hit setor at present being the financial sector, and major issue being the "LIQUIDITY
Crises" in the market.
In-spite of the various measures to subsidies the impact of the recession and cut down the
inflation present nothing really sound have been done.
Various steps taken by RBI to curb the present recession in the economy and counter act the
prevailing situation.
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The sudden drying-up of capital inflows from the FDI which were invested in Indian stock
markets for greater returns visualizing the Potential Higher Returns flying back is continuing
to challenge liquidity management. At the heart of the current liquidity tightening is the
balance of payments deficit, and this NRI deposit move should help in some small way.
Because of the various reforms and improvement in various sectors strengthen the Indian
economic system. After the reforms period Indian GDP reflects the positive trends.
The reforms progressed furthest in the areas of opening up to foreign investment, reforming
capital markets, deregulating domestic business, and reforming the trade regime.
Liberalisation has done away with the Licence Raj (investment, industrial and import
licensing) and ended many public monopolies, allowing automatic approval of foreign direct
investment in many sectors. Rao's government's goals were reducing the fiscal deficit,
privatization of the public sector, and increasing investment in infrastructure. Trade reforms
and changes in the regulation of foreign direct investment were introduced to open India to
foreign trade while stabilizing external loans. Rao's finance minister, Manmohan Singh, an
acclaimed economist, played a central role in implementing these reforms. New research
suggests that the scope and pattern of these reforms in India's foreign investment and external
trade sectors followed the Chinese experience with external economic reforms.
A COMPARATIVE CHART OF SENSEX IN PRE AND POST LIBERALIZED ECONOMY:
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The above chart reflect that before the reform the BSE Sensex is below 2000 and after the
reforms it shows a positive trends because of following reason:
➢ The major step taken in the reform is the Establishment of SECURITIES
EXCHANGE BOARD OF INDIA. Which regulate the whole stock market?
➢ Entry of foreign institutional investor, who played a very important role in the success
of stock market.
➢ Rules and regulation which strengthen the stock market.
➢ Economic perspective of the Indian stock market performance.
➢ After the reforms Indian stock exchanges has taken various step such as:
Establishment of National Stock Exchange, Depositories, introduction of mutual fund,
Dematrialisation of securities etc…

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➢ Electronic trading also a positive effort taken by the SEBI to make stock market more
effective.
WHY STOCK MARKETS AND BANKS BOTH, INDEPENDENTLY OF EACH OTHER,
BOOST ECONOMIC GROWTH?
Although the empirical evidence is consistent with the view that stock markets and banks
promote economic growth independently of each other, the reasons are not fully understood.
One argument is that stock markets and banks provide different types of financial services.
Stock markets offer opportunities primarily for trading risk and boosting liquidity; in
contrast, banks focus on establishing long-term relationships with firms because they seek to
acquire information about projects and managers and enhance corporate control. (There is, of
course, some overlap. Like stock markets, banks help savers diversify risk and provide liquid
deposits. Like banks, stock markets may stimulate the acquisition of information about firms,
because investors want to make a profit by identifying undervalued stocks to invest in; stock
markets may also help improve corporate governance by simplifying takeovers, providing an
incentive to improve managerial competency.)
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FINDINGS OF THE RESEARCH:
➢ Indian economy and Indian stock market are positively related to each other. A positive
growth of Indian economy reflects the significant growth of Indian stock market. Apart
from this a positive growth in stock market investments reflects the growth in valuation
of organization which ultimately leads to the growth of the Indian economy.
➢ There are significant impacts of reforms on Indian economy. Step taken by Indian
government are strengthen the economic system.
➢ Capital market reforms influence the investments pattern of foreign as well as domestic
investors.
➢ Indian economy leads to the growth of stock market with positive correlation.
➢ Indian stock market is the gateway to increase the value of the organization. Where open
trading of various securities reflects the market value of the organization.
➢ With the development in Indian economy since pre liberalized period stock market get
positive development.
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➢ Indian government has taken various steps to strengthen the stock market and economic
system.
➢ Apart from Indian economy, the stock market affected from various other factor such as:
investments from foreign institutional investors, Demand and supply of order to buy or
sell the various securities.
➢ Indian economy also affects from various other factor such as: various sector as service,
transportation, power etc...
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CONCLUSION OF THE STUDY:
In developing countries like India the positive growth of economy and stock
market is possible through the proper strategies and balance of both. On the basis of analysis
and findings, it is clear that economy leads the stock market and vice-versa.
➢ The Indian stock market is uncertain but fundamentally it depends upon economic
condition and various other factors.
➢ Economic condition of developing countries like India depend upon income and
consumption pattern and growth of industrial, service , transportation sectors etc…
➢ The combination of both stock market and economic development leads to the rapid
growth of any individual country.
➢ Highly affected economy from the foreign investments.
➢ The stock market is driven by changes in economic growth.
➢ Economic performance (1994-2005)

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By 1995, the Indian stock markets were busy restructuring their systems. The industry
continued to consolidate/restructure, improved its efficiency and shifted focus from
capacity creation to cost competitiveness.
➢ Remember: Many factors can affect stock prices as well as economy of the
country.
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RECOMMENDATION OF RESEARCH:
After the analysis of the project study, following recommendations can be made:
➢ Simplifying procedures and relaxing entry barriers for business activities and
providing investor friendly laws and tax system for foreign investors.
➢ There should be strict rules and regulation for strengthen the stock market and
economy of the country.
➢ Government should taka care economic system and regulation of stock market to
protect the interest of Indian people.
➢ There should be strict regulatory framework for economic and stock market activities.
➢ Indian government should emphasis on infrastructure development which leads the
Indian economy as well as stock market through change in investments pattern of
Indian people.
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➢ More emphasis on untouched sector of Indian economy at the time of policy
formulation.
➢ There should be positive correlation between stock market development and Indian
economy.
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LIMITATIONS
besides following scientific methodologies the study has come across some limitations. These
are:
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The Indian capital market was plagued with many limitations such as following.
• Uncertainty of execution.
• Uncertain delivery and settlement period.
• Front running, that is trading ahead of a client based on knowledge of the client order.
• High transaction cost
• Absence of risk management
• Club mentality of brokers
• Private off market deals.
But now Indian capital market is organized, fairly integrated, mature, more global, and
modernized. The Indian equity market is one of the best in the world in terms of technology.
1. The study is based on Sensex sample. The Sensex index has an external image that they are
the best performers in the country. If the sample companies consist of probably a
heterogeneous group then the results may give better insight in to relationship of the specific
variables.
2. The data is taken on monthly basis. The data on daily basis can give more positive results.
3. Due to time constraint, my research report is not fully exhaustive.
4. Secondary data that I have used in this study may not give true picture of the concern.
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5. The complexities of economy and stock market.
6. Relevant data collection about economy and stock.
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There are following data which shows the trends of the stock markets of various country after the
liberalization.
The above data shows the trend after the liberalization in various country and the effects of reforms
on SIZE, LIQUIDITY AND VOLATILITY.
In case of Indian Stock Exchange it has improvement in size and liquidity. Apart from this Indian
stock market is more volatile. Because of various factor introduced in reforms.
GROSS DOMESTIC PRODUCT: There are following data of GROSS DOMESTIC PRODUCT of
India in pre and post liberalization period.
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The data shows the trend of the GDP in various phases.
India’s Growth Performance
(Percent per year)
Total GDP
Growth
1970-72 to 1980-81
(average) 3.2
1981-82 to 1990-91
5.7
(average)
1991-92 1.3
1992-93 5.1
1993-94 5.9
1994-95 7.3
1995-96 7.3
1996-97 7.8
1997-98 4.8
1998-99 6.5
1999-2000 6.1
2000-01 4.0
2001-02* 5.4
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1992-93 to 1996-97
6.7
(average)
1997-98 to 2001-02
5.4
(average)
2002-03 3.8
2003-04 8.5
2005-06 7.1
2004-05 7.5
2005-06 9
2006-07 9.5
2007-08 9.2
2008-09 6.7
2009-10 7.2
The above data shows the growth of GDP.after the reforms India GDP shows a positive trend
but again due to recession it become down in 2008-09.The recessionary impact on India
reflect the slowdown in Indian economy.
India will suffer a lot of pain in the next 18 months, as the economy slows down along with
the current global slowdown.
The US, Europe and Japan are sinking into recession together. Forget claims that India has
decoupled from the US and can keep growing fast regardless. India and most developing
countries are indeed much less dependent on the US economy than in the past. So, Indian
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growth will be dented rather than smashed. GDP growth will slide from 9 % last year to 7%
this financial year, and to maybe 6% next year.
This recession affects the whole economy of the world. So India also affects from this up to
some extent.
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BIBLIOGRPHY:
I have used following references to prepare this research report. The bibliography includes:
WEB SITES:
www.nseindia.com
www.bseindia.com
www.economywatch.com
www.wikipedia.com
www.google.com
www.sharemarketbasics.com
JOURNAL:
Journal of national stock exchange.
Journal of financial management
BOOKS:
Indian Financial system, Khan M Y
Financial Services, Dharamraj E
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“COMPARATIVE STUDY OF STOCK MARKET DEVELOPMENT AND 2010

ECONOMIC GROWTH,PRE AND POST LIBERALISATION OF

INSTITUTE OF PROFESSIONAL EXCELLENCE AND

INSTITUTE OF PROFESSIONAL EXCELLENCE AND MANAGEMENT

I would like to express my Acknowledgement to those people, without whose contribution,

who helped me in a lot?

opportunity and being able to get a glimpse of the Corporate Word.

I am also thankful to Dr. Chhaya Tyagi (Sr. Lecturer M.B.A.)

for their constant Support and valuable suggestion.

Mr. JITENDRA SIGNH

market and Indian economy are correlated to each other.

I Jitendra Singh, Student of MBA II Year, Institute of Professional Excellence and

5. INTRODUCTION AND HISTORY

STOCK MARKET 5-20

INDIAN ECONOMY 21-39

7. SCOPE OF THE STUDY 42-43

8. USE AND IMPORTANCE OF THE TOPIC 44-46

9. RESEARCH METHODOLOGY 47-50

10. ANALYSIS OF DATA 51-61

11. FINDINGS 62-64

12. CONCLUSION 65-66

13. RECOMMENDATION 67-68

STOCK MARKET OF INDIA

market forces (i.e. demand and supply for a particular stock).

in the market, its price will fall down.

CONCEPT OF STOCK EXCHANGE

"association, organization or body of individuals, whether incorporated or not, established for

an important function in mobilizing and channelizing resources which remain otherwise

investment in the capital structure of industries.

finances almost to entrepreneur’s needs. Indian

to be transacted towards the close of the eighteenth century.

recognized by banks and merchants during 1840 and 1850.

sold at Rs. 87).

Other leading cities in stock market operations

formed "The Ahmedabad Share and Stock Brokers' Association".

enjoyed phenomenal prosperity, due to the First World War.

by 1923, and so it went out of existence.

Punjab Stock Exchange Limited, which was incorporated in 1936.

Existing structure of the stock exchanges in India

exchanges of Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati,

corporate bodies or Association of Persons (AOPs), are non-profit making organizations.

Powers that may be exercised by the Stock Exchange

regulation and maintenance of such clearing house;

c. The regulation or prohibition of blank transfers;

d. The regulation, or prohibition of badlas or carry-over facilities;

e. The fixing, altering or postponing of days for settlements;

and lowest rates for securities;

insolvency on the part of a seller or buyer or intermediary, the consequences of a breach or

I. The regulation of taravani business including the placing of limitations thereon;

prohibition of trading in any specified securities;

l. The levy and recovery of fees, fines and penalties

and minimum prices for securities;

o. The regulation of dealings by members for their own account;

p. The separation of the functions of jobbers and brokers;

Indian Stock Exchanges - An Umbrella Growth

and Hyderabad Stock Exchange Limited (1944) were incorporated.

amalgamated into the Delhi Stock Exchanges Association Limited.

History of the Indian Stock Market - The Origin

Century business in its loan securities gained full momentum

Bombay. Trading list by the end of 1839 got broader

1850's Rapid development of commercial enterprise saw brokerage business

attracting more people into the business

1860's The number of brokers increased to 60