India's m-cap to GDP ratio crosses 100% for first time in over a decade

BSE-listed companies' market capitalisation reached Rs 197.7 trillion on Thursday, against India's nominal GDP of Rs 190 trillion during 12 months ended December 2020

The combined market capitalisation of all listed companies in India has crossed the country’s GDP for the first time in more than 10 years.

This happened last in September 2010, when the market capitalisation to GDP ratio was 100.7 per cent. The current ratio is, however, much lower than the all-time high of 149.4 per cent in December 2007.

In the past 15 years, the ratio has seen a low of around 52 per cent in March 2005, with a median value of 78.6 per cent.

On Thursday, the ratio on the BSE reached Rs 192 trillion, against India’s nominal GDP at current prices of around Rs 190 trillion during the year ended December 2020.

The GDP number is based on advance estimates for FY21 by the National Statistical Office (NSO). The government agency expects an 5 per cent year-on-year expansion in India’s nominal GDP in the second half of FY21 against a 20 per cent contraction in the first half of the year.

It expects India to end FY21 with nominal GDP of around Rs 195 trillion, lower than the current market capitalisation of the BSE-listed companies.

The ratio was 99 per cent at the end of December 2020, 56 per cent at the end of March last year, and 78 per cent at the end of December 2019. (See the adjoining chart.)

BSE market capitalisation is now up nearly 75 per cent since March last year against its 6.6 per cent decline in annualised nominal GDP during the period.

While this ratio is more than 100 per cent for developed markets such as the US, the UK, Japan, France, Hong Kong, Canada, Australia, and Switzerland, it is less than 100 per cent for Germany.

India has one the highest market cap to GDP ratios among the emerging markets. The ratio is 75 per cent for China, 70 per cent for Brazil, and 47 per cent for Russia. For Indonesia, a country with a per capita income similar to India’s, it is around 49 per cent.

For many analysts a ratio of 100 per cent and more is a sign of caution for Indian equity investors.

“Unlike developed markets, only a minor portion of the country’s GDP is represented on the bourses. The combined revenues of all listed companies is less than 50 per cent of GDP whereas it’s close to 100 per cent in developed markets,” said U R Bhat, director, Dalton Capital.

In the past the markets have not been able sustain the ratio of 100 per cent or higher for long.

Bhat, however, said it could be too early to use the ratio, given the contraction in India’s GDP this year.

“The GDP contraction and a post-pandemic rally on the bourses resulted in a double whammy for this ratio. This reduces its analytical power,” said Bhat.

Others find merit in direct valuation ratios.

“Direct valuation ratios such as price-to-earnings multiples and price to book value are better tools,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

On Thursday, the Nifty 50 index ended with a record price-to-earnings multiple of 40x while it was 35x for the BSE Sensex. The ratio is the highest for the Nifty since its numbers began to be available since 1999 while it’s the highest for the Sensex since October 1994.

The benchmark indices’ P/E multiple is now higher than in December 2007.