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1. Introduction
Identifying sectors that hold the key to economic growth helps in policy design, macroeconomic research and portfolio management. The identification is especially relevant for emerging market economies. Policymakers need to identify sectors that inhibit/promote growth and devise policies geared at boosting those sectors. Academic researchers and financial practitioners are interested in identifying sectors that drive the economy in the short and long run. In this paper, we estimate different sectors' ability to forecast the economic growth of a major emerging market economy – India.
While identifying sectors that hold the key to economic growth is relevant for all economies, it is particularly relevant for emerging market economies. And several developments in the Indian economy make a perfect case study to explore this issue. The current administration won a huge mandate in the 2019 national elections based on the continued pro-growth policies targeted at sectors like manufacturing, information technology, small-scale industries and banking sector, among others [1]. The benefits of such policies to these sectors in driving economic growth are frequently debated (Mohan, 2014; Anand et al., 2015; Zhu et al., 2018), particularly because India's economic growth has been sluggish in recent times [2]. It is thus imperative to identify sectors that inhibit/promote future economic growth.
Several studies focus on causal links between economic activity and aggregate stock market returns. Existing studies have two limitations. First, studies only explore the relationship between economic growth with aggregate stock market performance. However, certain sectors, for example, auto and consumer durables lead business cycle movements. Consumers' spending decisions on auto and durable goods are based on their expectations of future income. Thus, in predicting economic growth, these sectors should then provide better information than others [3]. Modeling the relationship using aggregate indices hides the role of sectors in driving economic growth. Ignoring this is perhaps the reason for not finding support for the hypothesis that stock market development spurs economic growth in OECD economies (Pradhan et al., 2015), Central and Eastern European countries (GaJdka and PietraSzewSki, 2016) and emerging markets (Estrada, 2012). The other limitation is the use of a long-term and backward-looking approach to model the relationship between stock returns and economic activity [4]. This is despite the convincing evidence that most variables...