A critical review of stock market development in India

• Published date: 01 February 2022
• Author: Samer Salameh,Asad Ahmad
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2316

ACADEMIC PAPER

A critical review of stock market development in India

Samer Salameh | Asad Ahmad

Department of Management, Jamia Hamdard,

New Delhi, India

Correspondence

Asad Ahmad, Department of Management,

Jamia Hamdard, New Delhi, India.

Email: asad7babar@gmail.com

The development of stock markets in the financial sector has been important. The

expansion of stock markets has compelled various researchers to analyze its relation-

ship with the economic process and development of countries. The studies have rev-

ealed that the performance of stock markets in a nation has a positive correlation to

its economic growth. Bearing this relationship in mind, studies are being undertaken

to recognize the elements responsible for stock market development in several

nations. The researchers all around the world are trying to better understand deter-

minants so that government establishments can create and target policies that may

help the development of stock markets which further helps in economic development

of the state. Throughout the past three decades, the global stock markets surged,

and emerging markets played a vital role in this boom. Recent researches have begun

to concentrate on the linkages between the stock markets and economic develop-

ment. There has been an extensive analysis of the connection between the stock

market and economic growth, but there is a dearth of theoretical empirical proof on

what determines stock exchange development. Keeping in view the importance of

stock markets in the development of economic development, the researchers in the

present study have tried to bring out the factors that play a positive role in the devel-

opment of stock market.

1|INTRODUCTION

There is no concise definition for the phrase “stock market develop-

ment”, which has been frequently used in connotation with the stock

market. It is a complex term, which can be defined in terms of its size,

volatility, level of global integration and liquidity (Ho, 2017). However,

it has been widely analyzed in terms of the stock market size and

stock market liquidity (El-Wassal, 2013). To simplify things, the

researchers have defined stock market development by analyzing the

market capitalization ratio (MCR) which is also known as the Buffet

Indicator. It is also defined as “the total value of all publicly listed

shares in a country's stock market as a proportion of its Gross Domes-

tic Product (GDP)”(Adam & Tweneboah, 2008; Ben Naceur,

Ghazouani, & Omran, 2007; Ho, 2017; Ho & Odhiambo, 2019). It is a

good proxy for stock market development as it positively related to

mobilizing capital and diversifying risk.

It has been suggested by Pilinkus (2010) that stock markets facili-

tate the redistribution of financial resources among separate eco-

nomic entities like individuals, corporations, and governments, thus,

forms an integral part of the economies of nations. It helps in effi-

ciently allocating financial resources in an economy by raising capital

for business corporations and to further enabling the transfer of capi-

tal from one party to another, and mobilizing savings. The economic

growth of a nation heavily depends on the stock market and their role

in the recent past has been dominant. Keeping in mind the importance

of stock market, researchers have tried to analyze the role of stock

markets in the economic performance of countries (Greenwood &

Smith, 1997; Levine, 1991; Obstfeld, 1994). It has been found that

there is a positive correlation between the performance of stock mar-

ket and the economy of a nation. The same, Dagar (2014) explained

the important role of the stock market in achieving the wealth and

growth of an economy. By helping to direct the flow of savings and

investment in the economy in channels that support the stockpiling of

capital, shows a strong positive relationship between the stock market

and economic growth. The economic growth has an inverse relation

with the stock market prices, that is, the falling stock prices depict

economic depression whereas rising stock prices depict economic

growth (Pilinkus, 2009). In the light of the report issued by the World

Received: 16 April 2020 Revised: 5 June 2020 Accepted: 15 July 2020

DOI: 10.1002/pa.2316

J Public Affairs. 2022;22:e2316. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons Ltd 1of7

https://doi.org/10.1002/pa.2316