A high 'market cap to GDP ratio' is not always a good thing, says Economic Survey. Here's why

With the ongoing bull run in the domestic equity market, the market capitalisation of India's stock market has seen a remarkable surge since FY19. The Economic Survey 2024 highlights that India's market capitalisation to GDP ratio has significantly improved over the last five years, reaching 124% in FY24 compared to 77% in FY19. This ratio is far higher than that of other emerging market economies such as China and Brazil.

China's market cap to GDP ratio increased marginally from 60% to 61%, while Brazil's ratio declined from 65% to 44% during the same period. Data showed that the total market capitalisation of BSE-listed firms jumped to Rs 387 lakh crore as of March 2024, up from Rs 151 lakh crore on March 31, 2019. The country's equity market capitalisation reached Rs 415 lakh crore ($5 trillion) in May 2024.

The survey attributed this growth to significant interest from both domestic and global investors, who view the Indian stock market as an attractive investment destination, as well as sustained IPO activity. As a result, the Indian market ranked fifth in the world by market capitalisation in FY24.

“It is essential to strike a note of caution. The market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication. Financial assets are claims on real goods and services. If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience,” the Economic Survey 2024 warned.

The survey also highlighted a surge in retail activity in Indian capital markets through both direct trading and indirect channels, such as mutual funds, in recent years. Individual investors’ share in the equity cash segment turnover was 35.9% in FY24. The number of demat accounts with both depositories rose from 114.5 million in FY23 to 151.4 million in FY24.

“The impact of this influx of individual investors is also reflected in new investor registrations with the exchanges, their share in total traded value, net investments, and ownership in listed companies. For instance, the registered investor base at NSE nearly tripled from March 2020 to March 2024, reaching 9.2 crore as of March 31, 2024, potentially translating into 20% of Indian households now channeling their savings into financial markets,” the Economic Survey 2024 noted.