We all know that China and India are going to be the great drivers of the world economy. That should, in spite of our seizing numerous opportunities to shoot ourselves is the foot, lead to a higher share of market capitalization for our economies. But the question is: how large is our share of market capitalization relative to the world’s? And how does that share compare with our share of GDP?
To try and answer these questions, we looked at the World Bank’s data indicators, a huge database of indicators from 209 countries. The results are very interesting.
Also See The Rise of the East (PDF)
Let’s look at the numbers for gross domestic product (GDP) first. In 1990, just before liberalization, India’s share of world GDP, according to the World Bank’s Development Indicators, was 1.4%. The share barely budged during the nineties, and it was at 1.4% in 1999. China, meanwhile, powered ahead, with its share of world GDP rising from 1.6% in 1990 to 3.5% in 1999. The nineties were also good for the US and its share of global GDP went up from 26.3% in 1990 to 29.8% in 1999. Not many signs there of a decline of the West.
The situation changed dramatically in the noughties. By 2009, the US share of global GDP fell to 24.3%, China’s share increased to 8.6% and India’s to 2.3%. It’s very likely, of course, that the 2009 numbers are skewed, because of the financial crisis that affected the West much more than it did India or China. But the trend is clear.
Now consider the trend for market capitalization during the period. In 1990, China had no stock market to speak of, India’s market cap was 0.4% of world GDP and that of the US was 32.5%. The nineties were a great decade for the US markets and its share of world market cap had improved to 46.1% by 1999, at the height of the dot-com boom. The world had discovered the Chinese markets and its market share in 1999 was 0.9%, while India’s was 0.5%. Note that both India and China’s share of world market capitalization in 1999 was much less than their share of world GDP. This anomaly had to be corrected.
That was precisely what happened in the 2000s. By 2009, China’s share of global market cap had moved up to 10.3%, according to the World Development Indicators database and India’s share was at 2.4%. Interestingly, China’s share of global market cap is now much higher than its share of GDP while India’s share of market cap is marginally higher and could have corrected in 2010, when GDP growth was strong, but the markets didn’t move up much. It’s very likely that for 2010, India’s share of global GDP will more or less equal its share of global market cap. China’s share of market cap too would have reduced in 2010.
One way to interpret the data is to say that the Indian and Chinese markets, especially the Chinese market, have overshot. A more optimistic interpretation is to say they are discounting the fact that India and China’s share of global GDP is bound to increase. But there’s one obvious conclusion that we can draw: The huge bull run of 2003-2007 was the result of market cap in India and China catching up with their share of global GDP. For the Indian markets, it’s entirely possible that they too can overshoot, just like the Chinese markets have. But it’s clear that the period when the markets had to catch up with the fundamentals is over. That should mean smaller returns, perhaps in line with the growth of nominal GDP, in future.
Graphics by Yogesh Kumar/Mint
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