The Indian economy is the third-largest in purchasing power parity, which will continue to grow in the foreseeable future. That said, the country’s booming economy is likely to experience several ups and downs, including movements in its stock market, which can significantly impact its growth.
For instance, from 1994-2005, the stock market in India underwent significant systematic restructuring. During this period, the highlights of the Indian economy included a GDP growth of 6.1% on average. On the other hand, the Indian stock market remained immune to the pandemic-induced economic crisis during the second wave of Covid-19 in 2021.
So, let’s understand how the stock market affects India’s economy:
The rise and fall in stock prices tend to influence numerous economic factors, including consumption and business investment. Moreover, just as how the stock market affects the economy, several conditions also impact the stock market.
Here are some of the ways in which the stock market affects our economy:
The markets get their volatile character from the price fluctuations of individual stocks. As prices increase or decrease, market volatility influences businesses and consumers. During a bull phase, the stock prices go up. More often than not it boosts the economy’s overall confidence. Likewise, consumer spending also rises as individuals become more optimistic regarding the market and buy more goods and services. So, businesses offering these products and services begin to produce and sell more.
Additionally, a larger number of investors may enter the market which may push prices even higher. As a result, positive stock market movements can contribute towards economic development. However, this is not always the case.
A rise in stock markets is not always coupled with economic growth. If you see 2021-22, stock markets breached all-time highs consistently and millions of new Demat accounts opened during this period; but our growth, measured by GDP, fell in almost every quarter during the financial year. This was because of the pandemic.
In contrast, when stock prices fall for a considerable period (known as the bear phase), they mostly affect negatively. Individuals may lose their optimism, with news reports on these price drops creating a sense of panic in the market. As a result, investors losing money are reluctant to spend more or turn to lower-risk assets, leading to a fall in consumer spending.
Any individual with an investment trust or private pension is affected by stock market movements, albeit indirectly. Many pension funds invest a considerable part in stocks, a drastic and consistent fall in prices can impact the value of these funds. This also indicates lower payouts in the future. Furthermore, households will have a lower income from pension, pushing them away from spending and saving more money.
A stock market crash generally makes other investment vehicles more attractive for investors. As a result, they can move out of shares and turn to invest in bonds or gold. In fact, these investment instruments are known to offer higher returns during periods of uncertainty.