3 min read.Updated: 09 Aug 2021, 05:54 AM ISTSalonee Desai
If Nifty 50 is to grow to 30,000 over the next 10 years, it should give annual returns of 7-8%
Numerous economists have rubbished the Narendra Modi government’s goal of $5 trillion gross domestic product (GDP) by 2025. But we tried to focus on the positives, taking a more realistic target of 2030. Following a rather conservative approach, we tried to work out how achievable the goal is, and what it would mean for Nifty 50?
A $5 trillion economy for India is absolutely achievable, with a beautiful blend of growth in labour, capital and technology. India is blessed with a large labour pool. It could be an attractive investment destination with the potential to pull in capital in the coming years as interest rates offered by developed countries keep falling. Moreover, the country has strongly focused on technology in recent years as more businesses realize the benefit of cost-cutting through technological innovation and integration.
However, what lacks certainty is the 2025 time frame. For the sake of our calculations, we took a more conservative stance and presumed that the $5 trillion GDP goal will be achieved within 10 years, which further got us thinking where would Nifty 50 be standing in 2030?
Nifty predictions are often emotion-based, with a heavy bias on the market’s excitement and sentiment. Since investors often fail to evaluate the economy’s long-term impact on equities, they usually have no idea what they can earn over time.
Depending on your economic outlook and a few basic calculations, you, too, can easily quantify Nifty 50’s value 10 years down the line, and even build best- and worst-case scenarios by simply tweaking your estimates. Let us show you how:
Currently, India’s GDP is about $2.78 trillion. After applying the current INR/USD exchange rate of ₹74.5, the converted GDP value stands at ₹207.1 trillion. In 2021, the market capitalization-to-GDP (m-cap–GDP) ratio touched an all-time high of about 116%. So, the calculated total m-cap comes to ₹240.72 trillion (116% of ₹207 trillion GDP).
Now, to calculate the GDP in rupee terms, we need a 2030 forecast of INR/USD rate. A logical way of doing this is to check the past trend of the US dollar-Indian rupee statistics. Historically, rupee has lost about 3% against the dollar per year. But since we believe in India’s growth story and its $5 trillion-strong economy, we can make a rough estimate of a limited depreciation of 1.5-2%, which translates rupee’s fall up to ₹87 against the dollar, giving us ₹435 trillion ($5 trillion) GDP by 2030.
Now, you may ask—where will the average m-cap-to-GDP ratio stand in 2030? We are in a bull market right now, and so this number is the highest-ever. Historically, whenever the ratio has crossed 100%, the markets have always corrected themselves, pulling down the ratio to hover only below the 100-mark. According to Moad PMS data, India’s m-cap-to-GDP ratio has always fluctuated around 80-85%.With a steady growth assumption in both the economy and the markets over the next 10 years, a conservative estimate of the market cap-to-GDP ratio could be about 95% in 2030. So, we can easily arrive at India’s projected total m-cap (Nifty) by 2030, which is ₹413.25 trillion (95% of ₹435 trillion GDP).
Of this total m-cap of ₹413.25 trillion, past trend is proof that only 50-55% makes up for Nifty 50’s composition. In that case, by 2030, the index’s total m-cap is expected to reach ₹206.23 trillion (50% of ₹413.25 trillion). And given that the total current m- cap at the 16,000 level is ₹109.73 trillion, calculating for ₹206.63 trillion m- cap, the Nifty 50 index is bound to spill over 30,000 by 2030.
Now, if Nifty 50 is to grow from the current levels of about 16,000 to 30,000 over the next 10 years, the index should give a 7-8% annual return (excluding dividends).
It’s a no-brainer that Nifty 50 can easily achieve the 30,000 mark by 2030. Interestingly, if we were to expect not 7-8% but the historical average of even 10% annual growth, Nifty 50 could touch the 30,000 levels as early as 2028 or even 2027.
Salonee Desai is senior equity research analyst at Moat Financial Services.