For the first time, the market value of India’s listed companies crossed $2.9 trillion—much higher than FY2020-21’s nominal GDP, which is estimated to have contracted to $2.6 trillion. On Monday, the combined market capitalisation (m-cap) of all 4,700-odd BSE listed firms touched a fresh all-time high of Rs 213.6 lakh crore, higher than the FY20 nominal GDP of Rs 203 lakh crore, or $2.8 trillion.
It’s also much higher than the estimated FY21 nominal GDP of Rs 195 lakh crore, or $2.6 trillion, the official data for which is due to be released later this month. If the ongoing equities rally sustains, chances are that we could emerge as the world’s sixth biggest stock market, overtaking Canada, Germany and France. As of March, India is ranked eighth.
The markets’ soaring spirits seem like a barefaced lie, masking the gravity of both economic and healthcare crises, but experts reason that it’s indicative of future optimism, perhaps anchored by hopes of a recovery in growth.In terms of the m-cap-to-GDP ratio, this translates to 109 per cent — much higher than the historical average of 75 per cent, but lower than the all-time high of 147 per cent seen in 2007. Market capitalisation, or market value, is calculated by multiplying share prices with total shares outstanding of all listed firms.
The m-cap-to-GDP ratio also indicates whether markets are underpriced or overpriced compared to the historical average. Broadly, a range between 50 per cent and 75 per cent is considered undervalued, 75-90 per cent fair valued, and anything above 90 per cent is modestly overvalued. India has rarely exceeded 100 per cent and the average of the last 20 years stands at 75 per cent.Some believe that m-cap-to-GDP, also known as the Buffett Indicator, isn’t a marker of economic progress since listed companies are a fraction of India’s GDP, or overall output.
“The ratio itself may not be useful, but its direction is. That’s because these listed companies include consumer goods, automakers, FMCGs, and others, whose products are bought by people. But it may not be a perfect indicator of economic progress. The question is whether the growth of these large companies indicates equitable growth? The answer is unclear. But it’s also true that when the formal economy goes up, the informal economy benefits, too. So, markets going up is definitely not a bad sign, but a reflection of expectations of market traders,” said Prasanna Tantri, assistant professor, ISB, whose research specialisation includes stock markets.
Meanwhile, foreign portfolio investors’ holdings in domestic equities touched $552 billion in just the three months ending March. The equities rally is also led by large-caps followed by gains in mid- and small-cap stocks, which are seeing record participation from domestic retail investors.
