Transcript of the Podcast
Hi I am Arjun Parthasarathy speaking and this podcast is on “Sensex has Grossly Under performed Nominal GDP Growth since 2008-09, will this Change? ”
India’s Nominal GDP has grown to Rs 135 trillion in fiscal 2015-16, up by 8.7% from 2014-15. The growth in Nominal GDP for India since 2008-09 has been extremely high, growing at a CAGR of 13.4% from Rs 56 trillion to Rs 135 trillion. Nominal GDP growth is inflation unadjusted growth in output while Real GDP growth is adjusted for inflation by the GDP deflator.
The growth in nominal GDP reflects both the volume and value of output growth in the economy. Rise in prices of goods and services impact nominal GDP growth as will the higher economic activity.
Going by the growth in nominal GDP, there has been a rise in economic activity and rise in prices of goods and services. This should ideally reflect on corporate revenue growth and earnings growth for well run companies, leading to rise in value of equities.
In the period 2009 to 2016, the broad measure of equities, the BSE Sensex, has grown at a CAGR of 8.7%, which is 4.7% lower than the growth in Nominal GDP. The fact that return on equities is lower than growth in nominal GDP suggests productivity is extremely poor for Indian companies. Productivity is measured by output that a resource generates without incremental cost. For example if a machine produces 100 units of output and another machine produces 150 units of output with the same cost of inputs, the machine producing 150 units of ouput is more productive.
Ideally if companies were productive, they would have been able to capture both the rise in economic activity and rise in prices as seen by the growth in nominal GDP. Companies could have shown higher earnings growth by lowering cost of production, which has not happened.
One of the reasons productivity has declined in the Indian economy is that companies went on a growth binge in the period leading into 2008-09 from 2003-04 when the Sensex returned 25% CAGR while Nominal GDP growth was 15%. Investors in Indian equities are still paying the price for the growth binge.
Going forward, will Sensex returns beat Nominal GDP growth. Nominal GDP grew 8.7% in 2015-16 while the Sensex returned negative 1.3%. The trend of equity under-performance to Nominal GDP growth is continuing. However given that many corporates have been forced to restructure businesses and increase productivity over the last seven years due to shareholder wealth being destroyed, there is a good probability that Sensex could outperform Nominal GDP over the next few years.
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