M-cap to GDP ratio hits 13-year high of 122%

Comes in the backdrop of 0.7% growth in India’s annualised GDP at current price

The listed companies in India are worth 122 per cent of India’s latest annualised gross domestic product (GDP) — the highest since December 2008, when it had hit an all-time high of around 150 per cent.

The ratio was 112 per cent at the end of June and 103 per cent at the end of March. India’s current market capitalisation (m-cap) to GDP ratio is nearly 55 per cent higher than the 15year median ratio of 79 per cent.

The combined m-cap of nearly 3,500 companies listed and actively traded on the BSE reached a new high of ~250 trillion on Tuesday and is up 120 per cent since the end of March 2020, and 33 per cent since the beginning of the current calendar year. This has created a wedge between stock valuations and India’s macroeconomic fundamentals.

With this current rally, the m-cap of all listed companies is now up nearly 61 per cent over the pre-covid level of December 2019. In comparison, India’s annual GDP at current prices is up just 2.5 per cent between the December 2019 quarter (Q3FY20) and Q1FY22. In fact, the gross value added (GVA) at constant prices in Q1FY22 was 7.9 per cent lower than in Q1FY20 and lowest in the last 14-quarters. GVA is a true measure of the output of goods and services in the economy as it excludes indirect taxes such as goods and service tax, excise, and Customs duty that adds to the GDP at market prices. There has been a sharp rise in indirect taxes in the last one year, boosting the GDP at market prices. India’s current m-cap to GDP ratio has raised concerns about the high stock valuations on Dalal Street. In the last 15 years, the ratio has been around 79 per cent on average, with 150 per cent being the highest, and 52.4 per cent the lowest, touched at the end of March 2005.

Analysts, say that there has been a rapid rise in m-cap to GDP ratios in most economies since March 2020, fuelled by a rally in asset prices. They point out that while India’s GDP and corporate revenues are yet to fully recover from the Covid shock, corporate profits reached an all-time high thanks to the macroeconomic changes brought about by the pandemic.

World numbers

In comparison, the ratio is 247 per cent at present in the USA, 135 per cent in Japan, 137 per cent in the UK, and 130 per cent in France. India, however, has the highest ratio among the BRICS countries with the exception of South Africa. Most analysts believe that the m-cap may continue to race ahead of GDP till the global money supply remains benign and inflation remains low.