India’s stock market stands apart as an enabler of mass prosperity (2024)

We disagree that stock market value, economic growth and job creation are poorly connected. Harvard Professor Ricardo Hausmann believes economic development is like a game of Scrabble, where the government supplies the vowels, the private sector provides the consonants, and the goal is to make more, longer and unique words. Our Licence Raj harshly restricted the supply of vowels and consonants; consequently, the private sector made only a few small words till 1991. Over the last decade, the government has raised the number of vowels by reducing sins of commission (lowering regulatory cholesterol, replacing excise with GST, adopting the Insolvency and Bankruptcy Code, paying subsidies through direct benefit transfers) and sins of omission (infrastructure, health, education and national security). Our stock market is now differentiated in three ways:

Complexity: India skipped the bulk job creation of mass manufacturing, but caught value creation through reverse engineering, technological skills and service exports. While many listed companies were uncompetitive in 1991 (think of animals bred in captivity finding it hard to live in the jungle), a renewed slate is growing faster than multinational competitors in sectors like pharma, software, banking, cars, other consumer goods, staffing and much else. India is more open to foreign capital than ever, but the fear that business in India would become like Wimbledon—it is played in England but no Briton ever wins—was misplaced. Tata Motors and Mahindra are worth more in market capitalization than Maruti Suzuki, and may also outsell it in the auto sector.

Diversity: Atmanirbharta or self-reliance means India has companies in many sectors (rather than a few selected for competitive advantage), diverse consumer markets (mass production with localization) and a large services sector (with higher employment elasticity than manufacturing). We have less concentration than Korea (where two big electronics companies are more than 20% of its market cap), Taiwan (TSMC alone is 25%) and Saudi Arabia (where 80% of its $2.7 trillion market cap is on account of Aramco), since our biggest company Reliance equals only about 6% of India’s market cap. Our sectors are widely distributed across financial services (at 33%), technology (14%), oil and gas (14%), consumer goods (9%), automobiles (7%) and pharma (4%). Unlisted inventory migrating to the stock market will further increase diversity; Ola and Ather are global technology leaders in electric scooters, Paperboat is outrunning the global cola duopoly and Manipal Hospitals is breaking ahead.

Institutionalization: India’s democracy, with its checks and balances, has blunted widespread crony capitalism. Institutional ownership of shares has risen from 10% in 1991 to 35% today, with a near doubling of equity holdings by Indian institutions from 8% to 15%. Corporate India now has less debt, less diversification, less unification of shareholder and executive roles, superior capital allocation and stronger boards. These combine with strong regulation of capital markets and banking to drive superior returns on capital; Nifty’s return-on-equity is a healthy 14%, while Korea and China are below 10%. India’s 80% premium to its MSCI-EM valuation is driven by governance as much as growth, its potential and shortages.

Mass prosperity needs land, labour and capital to combine and create jobs that draw people off farms (only 2% of rich-country workers toil in agriculture). This transition needs human capital, infrastructure and low regulatory cholesterol, but is impossible without a stock market that promotes private investment, risk-taking and job creation through meritocratic capital allocation. India is entering a virtuous cycle where fast-increasing jobs—in sales, customer service and logistics—are aimed at domestic consumption and also fuel it. Foreign direct investment from companies in need of refuge away from China are creating factory jobs, and some multinationals like Hyundai and Flipkart are contemplating domestic listings. Many Indian listed companies look likely to reach a critical mass in scalability, after which their job creation should accelerate.

India has only one worthy competitor: China. Twenty years ago, an investor told one of us, “India is a Mickey Mouse market; my single holding in China Mobile is worth more than my 25-stock India portfolio." Eight years ago, an investor asked one of us, “The Indian economy today equals China’s ten years ago; they were growing at 13% while you are growing at 7%. Why?" Our glib but not untrue answer: That gap is the fixed cost of democracy. China’s real estate and infrastructure investment drove growth and jobs but sabotaged their sustainability by ignoring domestic consumption, institution building and capital efficiency. Today, China’s 22% MSCI weight is marginally higher than India’s 18%. India’s qualitative market triad, combined with demography and democracy, positions us to overtake China in index weightage, market cap and foreign investment in about a decade.

The Brihadaranyak Upanishad says: You are what your deep, driving desire is. As your desire is, so is your will. As your will is, so is your deed. As your deed is, so is your destiny. India’s magnificent desire for democracy in 1947 was accompanied by an economic experiment that failed our destiny. China’s economic model after Mao forced its citizens to choose between their wallets and freedoms; it still bears the costs of that contradiction. India missed its tryst with destiny, but has made a new appointment that combines democracy with mass prosperity. It is an appointment we will keep.