India’s two leading stock exchanges, BSE and NSE, maintain that their standard indices are designed so as to represent changes in the real economy. However, just two sectors — oil and gas and financial services — cover nearly 40% of the Nifty-50. They account for 43% of the Sensex. Along with capital goods and basic materials, the four sectors together cover as much as 60% of the benchmark index. In contrast, the consumer goods makers find low representation –15% in the Sensex and 11% in the Nifty. The food sector, hospitality, retail, logistics, media & entertainment, textiles and chemicals form large part of the economy, but find no mention in the indices.
The Indian economy is consumption driven. According to reports of the Central Statistical Organisation (CSO), consumption demand has accounted for almost 60% of India’s GDP since 2008. Even during the economic downturn of 2008-09, the consumption sector was more resilient than investment demand. FDI inflows were also buoyant during the period. But, this was not reflected in the Indian equity markets since they favour interest rate sensitive stocks which create volatility.
A boom or bust in the Sensex and Nifty only reflects the price movement of 30 and 50 companies respectively. Relative movements in the indices do not signify changes in the health of the real economy. In order to be truly representative, the indices should apportion fair representation to all major sectors of the economy.
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