Studies have shown that the ratio of market capitalization to gross domestic product (GDP) has been going up over the last few years. The market capitalization of the companies listed on the Bombay Stock Exchange on 31 March 1999 was 34% of FY99 GDP at factor cost and at current prices. On 31 March 2008, market cap was 120% of FY08 GDP. But a big reason for the increase was the rise in the number of listed companies.

Also See Growth indicator (Graphic)

In order to leave out the effect of new listings, we took a look at the market cap of the companies that make up the Sensex. We found that the market cap of the Sensex companies as on 31 March 1999 amounted to 12.6% of GDP at factor cost and at current prices for FY99. This percentage went up to 15.9% in March 2000, at the height of the dot-com boom, and fell thereafter—reaching a low of 11.1% in March 2003, just before the start of the bull run of 2003-07. The table shows how this ratio went up by leaps and bounds thereafter and reached 51.9% in March this year. Since end-March, the market cap of the Sensex companies has shrunk by 40%. Assuming the market cap remains the same at end-March 2009 and taking a growth of 15% (7% growth and 8% average inflation) for FY09, the market cap-to-GDP ratio at the end of March 2009 would be 27.3%.

That’s still well above the market cap-to-GDP ratio in March 2000, at the height of the dot-com boom. Is the increase in this ratio the result of higher valuations, or the growth of these companies?

One way to consider that is to look at the Sensex valuations. In terms of the trailing price-to-earnings (P-E) multiple, the Sensex was at 11.34 last Friday, well below its trailing P-E of 13.74 at end-March 2003. In terms of the price-to-book multiple, the Sensex was at 2.37 on Friday, compared with 2.14 in March 2003. Even if we consider the price-to-book value multiple, the difference in valuation is not large. That indicates the difference between the market cap-to-GDP ratios is not due to valuations but is on account of the phenomenal growth of these companies in the last few years. Yet another reason is the change in the companies that comprise the Sensex, with some large and fast-growing companies now being included in the Sensex.

If we take the companies that comprise the BSE 500, their market cap-to-GDP has gone up from 26.7% in March 2002 to 53% currently (taking FY09 estimated GDP). And if we accept that valuations are more or less at the same levels as they were during the depths of the downturn in 2001-03, this increase in the market cap-GDP ratio is a measure of just how much of the growth in the last few years has been captured by the large corporate sector.

Graphics by Ahmed Raza Khan / Mint

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