Macroeconomic Analysis

Agriculture and Monsoon: Agriculture accounts for about a quarter of the Indian economy and has important linkages direct and indirect with industry. Hence, the increase or decrease of agricultural production has a significant bearing on industrial production and corporate performance. Companies using agricultural raw materials as inputs or supplying inputs to agriculture are directly affected by the changes in agricultural production. Other companies also tend to be affected due to indirect linkages.

A spell of good monsoons imparts dynamism to the industrial sector and buoyancy to the stock market. Likewise, a streak of bad monsoons casts its shadow over the industrial sector and the stock market.

Savings and Investments: The demand for corporate securities has an important bearing on stock price movements. So investment analysts should know what is the level of investment in the economy and what proportion of that investment is directed toward the capital market.

The level of investment in the economy is equal to: Domestic savings + Inflow of foreign capital – Investment made abroad. In India, as in many other countries, the domestic savings is the dominant component in this expression. The rate of savings in India has risen appreciably over what it was in the 1950s, 1960s and even early 1970s. During the decade of 1980s the rate of savings in India hovered around 21 percent. Currently it is about 26 percent. This rate compares favorably with the savings rate in most of the other countries in the world. Given a reasonably high level of savings rate in India, it appears that there is very little scope for further increase.

In addition to knowing what the savings are you should also know how the same are allocated over various instruments like equities, bonds, bank deposits, small savings schemes and bullion.

Other things being equal, the higher the level of savings and investments and the greater the allocation of the same to equities, the more favorable it is for the stock market.

Government Budget and Deficit:

Governments play an important role in most economies, including the Indian economy. The central budget (as well the state budgets) prepared annually provides information on revenues, expenditure, and deficit (or surplus, in rare cases).

In India, governmental revenues comes more from indirect taxes such as excise duty and customs duty and less from direct taxes such as income tax. The bulk of the governmental expenditures go towards administration, interest payment defense and subsidies leaving very little for public investment. The excess of governmental expenditures over governmental revenues represents the deficit. While there are several measures of deficit, the most popular measure is the fiscal deficit.

The fiscal deficit has to be financed with government borrowing which is done in three ways. First, the government can borrow from the Reserve Bank of India. This leads to increase in money supply which has an inflationary impact on the economy. Second, the government can resort to borrowing in domestic capital market. This tends to push up domestic interest rates and crowd out private sector investment. Third, the government may borrow from abroad.

Borrowing per se is not bad but if the borrowed money is not put to productive purpose, servicing the debt becomes very onerous leading to fiscal crisis.

Investment analysts examine the government budget to assess how it is likely to impact on the stock market. They generally classify favorable and unfavorable influences as follows:

1. A reasonably balanced budget
2. A level of debt (both internal and external) which can be serviced comfortably
3. A tax structure which provides incentive for stock market investment.


1. A budget with a high surplus or deficit
2. A level of debt (both internal and external) which is difficult to service
3. A tax structure which provides disincentive for stock market investment