BS@50: How we built the grand success called Indian stock market

Over the past 45 years, the 30-share blue-chip index has skyrocketed nearly 700 times, a compound annual growth rate of 15% in local currency terms

The domestic stock market stands as a great success story in India’s economic journey over the last five decades. Not only has the equity market’s performance been world-beating during this period, but the regulatory framework and infrastructure have also evolved to become one of the most efficient globally.

To appreciate the market’s success, let’s begin with 1979, the base year for the widely tracked benchmark Sensex, and assess how far we have come.

Over the past 45 years, the 30-share blue-chip index has skyrocketed nearly 700 times, a compound annual growth rate of 15 per cent in local currency terms. Since 1979, Indian markets have consistently outperformed their global counterparts. For comparison, the S&P 500 index, a gauge for the top 500 US-listed stocks, has increased a little over 50 times, while Japan's market has grown 6.4 times, Malaysia’s 9.5 times, and Germany’s 33.

“In the last 20 years, India and the US have been the only large equity markets to give double-digit compounding,” says Saurabh Mukherjea, chief investment officer at Marcellus Investment Managers, a Mumbai-headquartered portfolio manager. This highlights the importance of competition and contestability, both in the economy and politics. “Although a highly contested democracy may appear unsettling to investors who prefer efficient dictatorships, the consistent question is, where are the returns?” he asks. Citing the example of China, he says the Chinese stock market has compounded at less than half the rate of the Indian market over the last 20 or 30 years.

India’s stock market journey, however, has been anything but smooth. The past five decades have seen the market endure several shocks, beginning with the oil crisis of the 1970s, followed by the Gulf War in 1990, the Harshad Mehta scam in 1992, the Asian financial crisis and the Kargil War in the late 1990s, the dotcom bubble at the turn of the century, the 9/11 terrorist attacks in 2001, the global financial crisis in 2008, and more recently, the Covid-19 pandemic.

Most of these events triggered significant downturns in both global and domestic markets. Yet, on almost every occasion, the Indian markets have demonstrated remarkable resilience, bouncing back stronger.

Typically, stock market growth mirrors the broader economy's trajectory — that is, nominal gross domestic product (GDP) growth. The Indian market’s growth has been underpinned by consistent economic expansion, a favourable demographic, government reforms, large domestic savings, a shift towards high-growth industries, and a robust regulatory structure. These factors are expected to propel the economy and markets in the coming decades as well.

Over the next decade, India’s economy is projected to grow at over 7 per cent annually, providing a strong foundation for continued stock market growth.

According to a report by foreign brokerage HSBC, “New India will make up a quarter of the economy by 2032, from just 15 per cent in 2018. The industrial sector will be larger, the agricultural sector smaller, and the services sector relatively big for an emerging market. India will also stand out on the global horizon as a major economy, which transitions to upper-middle-income status with a relatively small share of industry and a relatively large share of services.”

India’s population further bolsters this optimism. Last year, India surpassed China to become the most populous country in the world. With a median age of 27.6 and a youth population of 254 million (aged between 15 and 24), India is one of the youngest countries globally with the world’s largest youth population.

“The Indian economy will be even more competitive,” says Mukherjea. “Beneath the top 600 companies, 6,000 more challengers are emerging — companies with profits between $6 million and $60 million, growing at a rapid rate of 25-30 per cent.” They benefit from India’s expanding digital and physical infrastructure, he adds. “Over the next 10 years, competition will surge, likely leading to more churn in the Sensex than we've seen before.”

Currently, India’s market capitalisation is around $5.5 trillion, making it the fourth-largest stock market in the world, behind the US, China, and Japan. In the coming years, both India’s economy and its market are poised to surpass $10 trillion — an exclusive club currently occupied only by the US.

Any discussion of India's stock market would be incomplete without recognising the strides made in regulatory infrastructure, which have not only encouraged new investments but also saved millions of dollars in trading costs.

Significant reforms introduced by the market regulator, the Securities and Exchange Board of India (Sebi), which was established as a statutory body in 1992, include the successful transition to a T+1 settlement cycle, where trades are settled on the next business day. This represents a massive shift from the days of physical share certificates to digital transfers, reducing the settlement timeline from T+16 to T+1. Similarly, the initial public offering (IPO) listing timeline has been slashed to three days from several weeks.

As India forges its path as a global economic powerhouse, the stock market remains a vital barometer — one that reflects not just the nation’s economic aspirations, but its ability to overcome challenges and seize opportunities.