India Market Capitalization Moves up

The share of the Indian stock market in world market capitalization went up to 1.54% on Friday as the benchmark Sensex scaled the 15,000 mark in intra-day trading.
Three-and-half years ago, before the beginning of the current bull run, on 31 December 2003, this proportion was 0.92%. India’s stock markets have since outperformed most of the world’s markets, generating more than $786.5 billion (Rs31.46 trillion) in shareholder wealth since 1 January, 2004

Over the past three years, the Morgan Stanley Capital International (MSCI) index for India has risen by an annualized 49.9%, compared with 36.7% for the MSCI Emerging Markets Index. It has hugely outperformed the MSCI World Index, which has gone up at an annualized rate of 15.6% during the period. As a result, India’s share of global market capitalization has been rising steadily. Ajit Surana, stockbroker and managing director, Dimensional Securities, says, “I’m not surprised by the result. A combination of good performance in the secondary market and the large number of new listings in the last three years is responsible for the improvement in the ratio.”

Nevertheless, despite the Sensex reaching new highs, the pace of growth has slowed. This is evident from the fact that India’s market capitalization as a percentage of total global market capitalization fell from 1.63% in December 2006 to 1.54% now.
Part of the reason for the market’s outperformance has been the spurt in economic growth, with India’s gross domestic product (GDP) growing above 8% per annum over the past three years. India’s share in world GDP has also risen, from 1.34% in 2003 to 1.54% in 2005-06.
However, India’s market capitalization has been increasing much faster than the rate of growth of GDP.

“That’s entirely on expected lines,” says Madan Sabnavis, chief economist, NCDEX, “since the growth of the equity markets is often unrelated to conditions in the underlying real economy.”

The ratio of India’s market capitalization to GDP has also been rising steadily. One reason, say analysts, is the rising tide of global liquidity that has made its way to Indian markets in the last few years.

But it’s not just liquidity that’s contributing to this,says Sabnavis. “As an economy develops, the proportion of financial services rises since people can afford to save and invest more,” he says.
These factors have led to India’s market capitalization to GDP ratio rising from 57% in 2003 to 123.80% currently.

Indranil Pan, chief economist with Kotak Mahindra Bank, says that it makes more sense to compare the rise in India’s market capitalization with those of other emerging markets. By that yardstick, China’s growth in market capitalization has been 321% between 31 December 2003 and 6 June 2007 compared with a rise of 281% for India and 215% for Indonesia. A slew of big-ticket Chinese initial public offerings have contributed to the huge rise in China’s market capitalization.

Can the trend of a rising market cap to GDP ratio be sustained? Analysts believe it can. According to Ajay Parmar, head of research at Emkay Securities, “Indian investors put a minuscule proportion of their wealth into equities. As this proportion rises, so will the ratio of market cap to GDP.”