GDP: Reflecting India’s Growth and Development Prospects

The Indian equity market continues its remarkable ascent, starting the month with substantial gains and once again reaching its all-time high. A key catalyst behind this surge is the recently released GDP data, which revealed an impressive 8.4 per cent growth for India’s GDP in the third quarter of FY24, surpassing even the most optimistic forecasts. Consequently, global agencies are busy revising their GDP growth projections for India, with Moody’s Investor Service upgrading the country’s GDP growth rate to 6.8 per cent from 6.1 per cent for the year 2024.

This scenario may seem contradictory to the period during the corona virus pandemic when the economy contracted, yet the equity market delivered positive returns. However, in the long run, such occurrences are not contradictory, as equities tend to reflect the profit growth of companies, which in turn is closely linked to underlying economic growth. It is widely assumed that GDP growth translates to shareholder returns through three steps: first, it manifests as corporate profit growth; second, the aggregate earnings growth leads to earnings per share (EPS) growth; and finally, EPS growth translates into stock price appreciation. This clearly gets reflected in our equity indices’ performance.

Examining the past 20 years ending in 2023, the Indian economy, measured by GDP, has grown by 11.9 per cent annually in nominal terms, including inflation. Comparatively, the Nifty 50 index has witnessed an annualised appreciation of 15.7 per cent during the same period, rising from around the level of 1,000 in 2003 to 21,700 at the end of 2023. Analysing the net profit growth of Nifty 50 companies over the same period reveals a similar trend, with a compound annual growth rate (CAGR) of approximately 16 per cent, mirroring the growth observed in the Nifty 50 index.

Despite occasional disparities, the market ultimately tracks the underlying profit growth trajectory of companies over extended periods. Hence, if the current GDP growth rate persists, a scenario we are highly optimistic about, it is plausible to anticipate double-digit returns from the Indian equity market in the foreseeable future. This enduring and robust correlation between profits and market performance should instil confidence among investors considering Indian equities as a viable investment option for the next 10, 15 and 20 years, buoyed by India’s potential for sustained and robust economic expansion.

In the upcoming period, short-term volatility may arise from global factors such as the US Federal Reserve’s interest rate decision, as well as domestic events like the union elections. Nevertheless, it’s crucial not to be swayed by these fluctuations. Our cover story in this issue delves into the concept of base rate investing, illustrating how long-term investors should approach their investments and remain focused despite such volatilities.

In one of our sector reports in this issue we have delved deep into what is the reason for better performance of the metal and mining sector and what you can expect going ahead. As we continue to explore and analyse key sectors and investment strategies, our aim remains to equip you with the right insights and knowledge to make informed decisions, capitalising on the growth potential that India’s vibrant economy has to offer. Stay tuned.

RAJESH V PADODE
Managing Director & Editor