Formalisation of the economy can take India's market capitalisation to $5 trillion: Experts

Benchmark Indian equity indices are quoting at their all-time highs backed by a strong economic revival from the Covid jolt. With strong perfomance, the market capitalisation has touched $3.13 trillion taking the marketcap to GDP ratio to over 100%. So, now the question arises how, when and what will it take India to reach the $5-trillion market capitalisation.

“Formalisation of the economy can drive both GDP & market capitalisation as a large part of the economy is informal in nature and very under-represented as far as the market is concerned,” said Sanjeev Prasad, MD & co-head of Kotak Institutional Equities at the Motilal Oswal Global Partner Summit.

The other factor that could drive the market cap is increasing production of energy, electronic goods in India, Prasad added.

“India needs to move away from the cyclical nature of the economy to a secular and a high growth economy. That apart, a lot of decision making is more of a narrative with a weak execution due to lack of planning,” explained Venugopal Garre, MD of Bernstein.

Execution is key

There is a lot of excitement in India’s startup ecosystem, which now has easy access to funding and digitisation is aiding the formalisation of the economy and job creation.

Formalisation of the economy will make a big delta in how the earnings growth of a company can get accelerated. According to Ganeshram Jayaraman, MD – Institutional Equities at Spark Capital Advisors, earnings are likely to grow at a compounded rate of 20% over the next four years led by demand recovery, industry consolidation, inflation and operating leverage and formalisation will only add to the earning potential.

The journey

India took 10 years to move from $1 trillion to $2 trillion and the next trillion was made in four years of which half-trillion was made in the last six months.

“In the previous decade, earnings compounded at just 6%, way below India’s potential. After many years India has witnessed double-digit earnings growth. It seems that cycle is changing, asset quality cleaned up in the financial sector,” said Gautam Duggad, head research – Institutional Equities at Motilal Oswal Financial Services.

All in all, a combination of organic growth from companies that are already listed, earnings acceleration, bottoming out of corporate profit to GDP ratio, new listings, the new driver for manufacturing and formalisation of the economy will drive the market capitalisation to $5 trillion over the next 5-6 years.