Capital Currents

India recently crossed the $4 trillion GDP mark, as announced by the Chief of Niti Aayog. With this, India became the fourth-largest economy, behind only the United States, China, and Germany.

This is a significant milestone both economically and from a stock market perspective. Ideally, GDP growth and stock market growth should move in tandem. Historical data shows a strong rally in market indices as economies grow from $3 trillion to $5 trillion. India is now halfway through this phase.

India reached the $3 trillion mark in 2021. Since then, GDP has grown by 33%, while the stock market has risen by nearly 50%. The Nifty 50 index moved from 16-18K to nearly 24,800.

Can we expect similar performance as we move towards a $5 trillion economy?

Let’s look at other countries and how their markets responded between $4 trillion, $5 trillion, and $10 trillion GDP levels.

		United States	China	Japan
	Index	Dow Jones	SSE Composite	Nikkei 225
A	$4 T GDP	1,212	1,820	17,400
B	$5 T GDP	2,169	3,277	19,300
	Growth (B/A)	79%	80%	11%
C	$10 T GDP	10,788	3,234	—
	Growth (/A)	790%	78%	—

The picture is mixed. The US and China experienced strong stock market growth till $5 trillion. Japan, however, had only moderate returns. Interestingly, China saw no major gains till it reached $10 trillion, whereas the US witnessed significant appreciation.

Before going further, let us first understand the Buffett Indicator:

The Market Cap to GDP ratio is often referred to as the Buffett Indicator, popularised by Warren Buffett. It is a broad measure used to assess whether a country’s stock market is overvalued or undervalued relative to the size of its economy. A ratio above 100% typically suggests that the market may be overvalued, while a significantly lower ratio could indicate undervaluation.

Looking deeper, the United States saw strong growth in the 1980s and 1990s due to a combination of fundamental economic expansion and a shift in valuation from undervalued to fairly valued or even overvalued markets.

United States	GDP	Market Cap to GDP Ratio
1984	$4 T	40%
1988	$5 T	50%
2000	$10 T	132%

The US market experienced dual growth — one driven by fundamental economic expansion, and the other by a revaluation of stock prices as markets shifted from being undervalued to moderately overvalued. This combination was the primary driver behind the exceptional broad-market rally observed during the 1980s and 1990s.

China’s market tells a different story. Due to strict regulations and limited free-market mechanisms, stock valuations often didn’t reflect actual economic growth. Despite growing faster than the US, its market cap remained subdued.

China	GDP	Market Cap to GDP Ratio
2008	$4 T	38%
2009	$5 T	70%
2014	$10 T	57%

Despite globalisation and rapid technological integration in finance, Chinese markets have continued to trade at relatively undervalued levels. This disconnect is evident in the muted stock market performance, even as China’s GDP grew impressively — surpassing the US in terms of growth rate during its climb from $4 trillion to $10 trillion. While the US took 4 and 16 years to hit the $5 trillion and $10 trillion marks respectively, China achieved these milestones in just 1 and 6 years — yet without proportional stock market returns.

Japan’s stock market underperformed largely due to the bursting of its asset bubble in the early 1990s. At its peak in 1989, Japan’s Market Cap to GDP ratio hit 142%, after which it corrected and remained flat for years.

Japan	GDP	Market Cap to GDP Ratio
1993	$4 T	63%
1995	$5 T	69%

Now, coming to India. What can we expect?

India currently stands at a $4 trillion economy with a Market Cap to GDP ratio of 123%. Historically, such a level indicates overvaluation, making it a less attractive point for fresh investment. If India’s economy grows to $5 trillion without any stock market growth, the ratio will still remain above 100%, as the current market cap has already crossed $5 trillion.

Valuation Metrics vs. Fundamental Growth Outlook

	Bear Case	Neutral Case	Bull Case
GDP to Market Cap Ratio	90%	123%	150%

$5T Economy is expected to be reached in year 2027
Market Cap	$4.5T	$6.15T	$7.5T
CAGR	-7.8%	7.72%	18.95%

This indicates that future gains in the market will need to be driven more by fundamentals than valuation jumps.

Where Can India Expect Growth?

Despite India’s relatively high Market Cap to GDP ratio, several sectors are well-positioned to continue driving stock market growth. Core industries like infrastructure, green energy, financial services, and technology are expected to benefit from strong policy support, a young population, and rising consumer demand. In addition to these established sectors, emerging industries such as recycling, defence, railways, and semiconductors are gaining momentum, propelled by shifts in global economic priorities and India’s strategic initiatives to strengthen domestic capabilities.

What can we conclude from this?

For investors, the current valuation levels suggest a need for cautious optimism. While the broader market may not offer deep value, opportunities still exist in selective sectors and mid-cap or small-cap spaces that have not run up significantly. It’s crucial to focus on fundamentally strong companies with clear earnings visibility. Diversification, both across sectors and asset classes, becomes essential in such a valuation-rich environment. Investors may also consider keeping some liquidity on hand to take advantage of future corrections or value opportunities.

India’s journey from a $3 trillion to $5 trillion economy is well underway, but stock market performance may not mirror past trends due to already elevated valuations. Historical comparisons with the US, China, and Japan show that stock returns are influenced not just by GDP growth, but by starting valuations and market efficiency. With a Market Cap to GDP ratio above 120%, caution is warranted. While growth opportunities remain, especially in emerging sectors, a thoughtful, data-driven approach to investing will be key in navigating the next phase of India’s economic expansion.

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