Despite the dramatic fall in the market over the past year, the BSE-500’s market capitalization to GDP (gross domestic product) ratio is nowhere near the depths it had plumbed during the last downturn.
The BSE-500’s capitalization as a percentage of nominal GDP is currently around 51% (taking 6 March’s closing prices and the government’s advance estimates of GDP at factor cost and at current prices), which is slightly lower than the 54% it was at on 31 March 2005.
It’s still higher than the ratio of 45% on 31 March 2000, at the height of the dot-com boom, and nowhere near the nadir of 23% reached on 31 March 2001.
Even if GDP this fiscal year is less than the government’s rather rosy estimate, the ratio will still be well above the lows of 2001. In the US, stock market capitalization as a percentage of nominal GDP has fallen to 63% of GDP, which is back to a level last seen in 1990.
Unlike Indian markets, the high point of the US ratio was at the end of 1999, when it went up to a mind-boggling 180%. Even at the end of 2002, this ratio was a bit above 100 for the US and rose to above 140% by end -2006.
So, is the ratio saying the Indian market is overvalued? Not really, since both the price-to-earnings multiple and the price-to-book multiples are low and almost at levels they were plumbed during the 2001-03 downturn. Perhaps the higher ratio merely reflects that the growth of BSE-500 companies has been far higher than GDP growth in the last few years.
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