India's Stock Market: A Fair Deal or a Raw Deal?

How would you feel if you learn that despite contributing nearly 20% to your family's income, you are entitled to just 3% of the entire property?

Yes, that's right. You bring 1/5th the income but get only 3% share of the total wealth. You will be heartbroken, right?

Well, the worst is yet to come.

You also learn that your elder brother who although contributes 30% to the family income, has been given nearly 70% share of the property.

So, while he gets more than twice of what he deserves, you get a fraction of what should be rightfully yours.

If this sounds like grave injustice to you, your heart should certainly go out to the average Chinese investor. For he has been given a raw deal by the global stock market.

Well, I invoked this comparison between two brothers to drive home the huge disparity that exists in the global stock market today.

If a global stock market study is anything to go by, it will be fair to say that the US is eating the rest of the world for breakfast, lunch and dinner.

The country's market capitalisation as a percentage of the global marketcap is close to 70% currently although it makes up just 26% of the global GDP. In short, it is the brother that has been given the lion's share of the property.

China on the other hand, which is second in terms of GDP at 17%, accounts for less than 3% of the global market cap, making it the sulking brother of the property division example.

Let me repeat that again. US contributes 26% of global GDP but makes up nearly 70% of its stock market capitalisation while China contributes 17% to GDP and yet, makes up less than 3% of global market cap.

I agree that the US has a much better reputation than any other country when it comes to political stability, regulatory environment, and protection of ownership rights.

However, this alone does not explain why investors are buying US stocks hand over fist.

They are also buying them in anticipation of steady earnings growth and capital appreciation.

It is simply staggering how despite its enormous size, the US economy continues to chug along at a decent pace, thus continuously producing more output and also creating more wealth and prosperity for its citizens.

Be it productivity growth or launch of new businesses and industries, the US has a significant lead in these areas over its developed counterparts.

Little wonder, it continues to be a magnet for stock market inflows.

What about India though? Where does our beloved country fit into this overall scheme of things?

Is it the sulking brother that gets a much lower share in property as compared to its contribution or does it continuously punch much above its weight like the US does?

Well, of course our position is not as good as the US but it is not as bad as China either.

It won't be wrong to say that we are being treated quite fairly at the moment. India currently constitutes 2% of the global market cap while contributing 3.4% to the global GDP.

Thus, as just highlighted, although there is a scope for improvement, our situation doesn't seem to be as bad as the dragon nation.

Having said that, we certainly can't rest on our past laurels. We should certainly look for ways and means to take this ratio higher in the coming years.

What will it take though? How do we continue to attract both domestic as well as foreign capital so that even more stock market wealth is created?

Well, one factor that can make a huge difference is the industrialisation of our economy or to put it differently, increasing the share of manufacturing in our overall GDP.

As per a piece I read recently, out of our total labour force stock, only 11% are in manufacturing. And guess what, agriculture still employs a significant 45% of our total labour force.

Hence, the goal should be clear, to move as many people as possible out of farms and into factories.

India may not get to the 40-45% peak labour force into the manufacturing sector of developed economies. But we can still try and get at least 25% of the total employment into manufacturing.

Please note that India's consumption driven growth and too much dependence on the service sector is already showing signs of fatigue if the recent GDP data is any indication. Government spending and investments in infrastructure can only help so much.

But if we have to sustain a GDP growth of at least 7-8% in the long term and lift millions more out of poverty, then manufacturing has to step up.

We have already created the world's largest democracy and a well-functioning capital market that can give any developed nation a run for its money.

Now, we need high output factories so that our workforce gets more productive and ushers in a new era of high GDP growth as well as robust stock market wealth creation.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)