India's market cap to GDP nears 100%

Indian stocks are nearing the red zone as the country’s market capitalisation is now almost equal to its gross domestic product (GDP). With the benchmark indices recording new highs, India’s market capitalisation has swelled to Rs 150.7 lakh crore, 95 per cent of GDP (on a trailing four-quarter basis). The market cap-to-GDP ratio was just 72 per cent a year ago.

The surge of 23 percentage points is due to exuberance in the equity market despite economic growth slowing. 

The Indian market cap has risen by Rs 44.44 lakh crore, or 42 per cent, in the past one year. Besides the sharp share price increase, high equity issuances, particularly initial public offerings (IPOs), have contributed to the increase in market cap this year.

Meanwhile, GDP has managed to rise by only eight per cent during the same period. Domestic GDP in the June quarter had slowed to 5.7 per cent (year-on-year growth) due to demonetisation and the introduction of the goods and services tax (GST). It saw a slight revival to 6.3 per cent in the June quarter. 

India’s market cap-to-GDP ratio was more than 100 per cent after the 2007 bull run. Stock prices had seen a significant meltdown after that amid the global financial crisis. 
 

According to experts, the ratio of more than 100 per cent is considered risky, while a figure of over 120 per cent is considered to be bubble territory.

 

Some say a high market cap-to-GDP reading may not be cause for concern because a lot of developed markets have been trading at more than 100 per cent for some time now. Also, economic growth is likely to come back to seven per cent-plus levels in the next fiscal year.

So far, experts have been justifying India’s expensive valuations by pointing at the low market cap-to-GDP reading. However, if stocks continue to go up and the GDP print remains muted, India will look expensive on this count as well.