Overvalued? India just 7th in market cap to GDP terms

Emerging markets stack-up

Stock prices are hitting the roof but is this really a matter for concern?

Look no farther than other emerging markets and you'll find that share prices have soared much more in many of these markets.

At the current market capitalisation of around Rs 18,00,000 crore and the current value of gross domestic product (GDP) at Rs 28,38,000 crore (according to figures furnished in the Economic Survey), India's market capitalisation as a percentage of its GDP is 61.8 per cent "" seventh among the 12 emerging Asian markets.

Indeed, India still lags behind Hong Kong, Singapore, Malaysia, Taiwan, Thailand and South Korea in terms of the market capitalisation to GDP ratio, though it's the third largest economy among emerging Asian markets.

The ratio for Taiwan, Hong Kong, Malaysia and Singapore is much higher than that for India, though their GDP is much lower than India's. But share prices are higher than in China, Asia's largest economy. China's market capitalisation to GDP ratio is currently 24.56 per cent versus India's 61.8 per cent.

In the market capitalisation to GDP ratio sweepstakes, India is ahead of countries like Philippines (the ratio is 36.9), Turkey (35.6 per cent), Pakistan (32.2 per cent), Indonesia (27.0 per cent) and China (24.6 per cent).

Indian stocks were relatively cheaper in 2002-2003 and had a market capitalisation to GDP ratio of 28.53 per cent. The relentless buying by foreign institutional investors (FIIs) after 2002-2003 pushed up Indian stocks prices, so much so that the ratio shot up to 52.25 per cent of GDP in 2003-2004.

Market capitalisation increased from Rs 6,02,000 crore in 2002-2003, to Rs 11,84,000 crore in 2003-2004 and then to the current level of Rs 18,00,000 crore.

India's GDP expressed in terms of current prices rose from Rs 20,81,000 crore in 2002-2003 to Rs 25,20,000 crore in 2003-2004 and then to Rs 28,38,000 crore now.

Interestingly, the market capitalisation to GDP ratio is high in economies where the services sector accounts for a large slice of the GDP "" Hong Kong, Singapore and Malaysia, for example.

Hong Kong has a market capitalisation to GDP ratio that is over five times its GDP as services accounting for 88 per cent of Hong Kong's GDP of $162 billion. Singapore's market capitalisation to GDP ratio is more than twice the size of its GDP.

Services account for 68 per cent of Singapore's GDP of $107 billion. In countries like China that have a large manufacturing base, services account for 32.3 per cent of GDP "" and China's market capitalisation to GDP ratio is 24.56.