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Market out of sync with economy

B G Shirsat, Manas Chakravarty in Mumbai | April 05, 2004 08:37 IST

The 10.4 per cent GDP growth in the third quarter of 2003-04 may have led to a 200-point rise in the Sensex, but the Indian stockmarket is very far from reflecting the state of the Indian economy.

While the services sector accounted for 50.5 per cent of the country's GDP in the first three quarters of 2003-2004, it accounted for only 29.44 per cent of total market capitalisation.

In sharp contrast, the industrial sector, including manufacturing, mining, electricity and construction, accounted for a mere 26.9 per cent of the GDP, but 69.91 per cent of total market capitalisation.

The biggest difference between the economy and the market, of course, lies in the agricultural sector, which amounted to 22.6 per cent of GDP, but only 0.47 per cent of market cap.

What's true of the overall market is true of the Sensex as well. As much as 69.15 per cent of the Sensex's market capitalisation is on account of manufacturing companies, while the rest of the companies are from the services sector. Within the services segment, finance companies account for 13.49 per cent of total market capitalisation and 12.27 per cent of the market capitalisation.

Skewed interest

 

Share of GDP in first 3 qrs of
 FY 2004

Share of mkt cap as on Mar 31 2,004

Agriculture

22.60

0.47

Construction

5.20

0.18

Manufacturing, Mining,electricity,

21.70

69.91

Finance

13.10

13.46

Other services

37.40

15.98

(in per cent)

In fact, since the GDP segment includes insurance, real estate and business services as well, while the market capitalisation is only for the finance, it's clear that the finance sector has a larger weight in market capitalisation than in the GDP. Conversely, the other segments of services are accordingly under-represented in the market.

However, the proportion of services in both GDP and market capitalisation has been growing. For example, services amounted to 43.6 per cent of GDP in 1996-1997, and its share has risen by 6.9 percentage points in the last seven years.

Over this period, the share of services companies in the Sensex has risen from 21.5 per cent to 30.85 per cent. Over the same period, the share of manufacturing companies has declined from 79.02 per cent of the Sensex to 69.15 per cent, while the share of industry in GDP has remained more or less the same, declining marginally from 27.8 per cent to 26.9 per cent.

Clearly, the market is slowly but surely correcting the distribution of its market capitalisation to reflect the underlying economic reality.

Analysts point out that many corporates in the services sector, such as companies in real estate, insurance, BPO, and many software companies are not listed, and as more of these companies come to the market, the market capitalisation of the sector will increase.

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