U.S. stock market movements do not reflect GDP growth – Does it hold true in India?

Dr. Madhavankutty G

Head – Banking, Economy & Policy – ET Prime, Times Group

The U.S. scenario

The U.S economy is expected to see severe slowdown in the first quarter (January-March) of 2020. The Federal Reserve’s Nowcast, a statistical model, estimates a contraction of 31% in output while JP Morgan’s assessment is that of a 40% contraction. However, its stock market indicator, the S&P 500, which tracks the 500 most valuable companies, declined only 12% year to date since January 2020. One of the reasons for this divergence with GDP growth is that the huge money pumped in by the U.S Federal Reserve (same as our RBI) worth USD 2 trillion would have found its way, at least in part, to the stock markets. Other reasons include weights of the sectors in the equity indices vis-à-vis GDP calculations, presence of informal sector etc.

The Indian scenario

In the Indian context also, GDP growth and stock market performance haven’t gone in tandem as shown below:

Table 1: India’s GDP growth and Sensex growth
(end March)
Source: BSE, Central Statistical Office

As the table above shows, it is hard to draw any clear correlation between stock market growth and changes in GDP.

The major reasons for this divergence are explained below:

1) Stock market indices are not representative: BSE Sensex and the NSE Nifty, the two major indices, are based on 30 and 50 most valued listed Indian companies. However there are more than 5000 listed companies in India and a majority of them are not represented in either of the indices. Thus a major portion of the activities taking place in different sectors are not captured in the stock market movements while they find a place in GDP calculations. This creates divergence.

2) Presence of a large informal sector: India has a huge informal and unorganized sector which is difficult to capture fully even in GDP calculations. In this segment transactions take place mostly in cash and this adds to the difficulty in tracking them. So we see that despite demonetization causing a serious impact on the unorganized segment, GDP growth and Sensex changes have been positive. Lack of representation of the informal sector is a major aberration.

3) Difference in weights: Sectoral weights differ in GDP calculations and stock market indices. For example, agriculture constitutes 15% of GDP while it is not represented in the stock indices. This means the rate of growth in agriculture sector which will be captured for calculation of GDP will find no place in any manner in equity indices. Similarly, even services sector is not fully represented. For instance, while the Sensex has the telecom index, it is reflected in trade, hotels, transport and communication head in GDP calculations and hence separate weight of telecom sector in GDP is not specifically available. Likewise, the tourism and hospitality segment which is a major component of the services sector and which contributes significantly to GDP has no sub index in Sensex or Nifty. (Refer Table 2 below).

4) Equity indices reflect futuristic trends and company policies: The future GDP growth outlook of a country would be already captured in the stock market valuations. So next year’s growth outlook of Indian economy will already get reflected in its stock markets. Also company policies are another variable. A company, for instance, may choose not to distribute dividends to shareholders which will depress valuations and hence have negative effect on equity indices but will have a positive impact on GDP since it is in business and continues to engage in production.

5) Political climate: The political climate of a country greatly influences its equity indices. For instance, in May 2014 equity markets in India surged significantly on hopes that the new political dispensation will deliver a stable government and continuity in policy reforms. For 4 out of 6 years from FY 14 to FY 20, Indian equity markets grew higher than GDP growth rate. However equity indices moderated in FY 20 due to slowdown but still fared better than GDP growth. First quarter of FY 21 could be one of the very few instances in India when both these show negative growth rates simultaneously.

6) RBI policies: RBI has been reducing interest rates and banks too have been passing on the benefit by cutting lending rates. This will benefit big corporates more since their transaction volumes are huge and they will also be able to negotiate better terms with their bankers due to higher credit worthiness. However, small businesses may not find even this reduced rate profitable for them as they enjoy lower limits with banks and their volumes are also lower. So equity indices, dominated by big corporates, will show huge spikes while GDP growth could be lower as the informal sector and agriculture, which form part of GDP, may not see much of an impact.

Table 2: The Table below shows why a one-to-one comparison is actually not simple.
Sensex SectorWeight (%)GDP SectorWeight (%)
Automotive5.30Agri & Animal husbandry14.60
Banking26.50Mining & Quarrying2.70
Cement / Construction1.70Manufacturing18.10
Technology19.30Trade, hotels, transport & communication19.43
Engineering1.99Public administration, Defense & others14.30
Metals & Mining0.50Finance, Real estate etc21.80
Oil & Gas 17.70
Source: CSO, BSE


1) Why is it said that stock market indices in India are not representative?

2) How does political climate emerge as a reason for the divergence in growth rates of equity indices and GDP?

3) Can company policies influence stock market valuations?

4) How can policies of a country’s central bank lead to sudden stock market increase, uncorrelated with GDP movements. Cite using examples of RBI and U.S. Federal Reserve policies.

5) Informal sector is not captured in stock market movements. What would be its impact?

6) A major reason for divergence in GDP and equity indices in India is difference in sectoral weights. Explain.


  1. Central Statistical Organization website
  2. bseindia.org
  3. bloomberg.com
  4. wise-owl.com
Dr. Madhavankutty G
Dr. Madhavankutty G

Prior to joining ET Prime, was Senior Economist with Bank of India. Prior to that was an Economist in Andhra Bank (now Union Bank of India) and also served in ICFAI University as a research fellow.
Also a Member of the IBA Monetary Policy Group, and was a visiting faculty in Economics area at NMIMS University, Navi Mumbai and K.J.Somaiya Institute, Mumbai.
Holds a Masters in Business Economics and is a Certified Associate of Indian Institute of bankers (CAIIB)


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