Market out of sync with the economy

Services, agriculture under-represented in market cap.

The 10.4 per cent rise in third quarter gross domestic product (GDP) may have led to a 200 point rise in the Sensex, but the Indian stock market 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 GDP, but 69.91 per cent of total market capitalisation.

The biggest difference between the economy and the markets, 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.

 

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)

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 of the Sensex. That's around the 13.1 per cent weight of the "finance, insurance, real estate and business services" sector in GDP.

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.