India's stock market stands apart as an enabler of mass prosperity

A triad of complevity, diversity and institutional strength makes a big difference for the better to its role as capital allocator

- MANISH SABHARWAL & DHIRAJ AGARWAL

India's stock market value crossing $4 trillion separates us from competitors; Brazil, Mexico, Thailand and Malaysia are worth about $0.5 trillion each, with Chile and Vietnam about $0.2 trillion. Our milestone is interesting, but history suggests that quality matters more than quantity; the 1988 launch of the Morgan Stanley Composite Index for emerging markets (MSCI-EM) gave Malaysia a weight of 33% (now 2%) and Brazil, Chile and Mexico also 33% (now 10%). Hong Kong's Hang Seng Index is unchanged from when China took over 27 years ago. We believe India's qualitative stock-market differentiation in terms of complexity, diversity and institutionalization creates a fertile substratum for mass prosperity.

We disagree that stock market value, economic growth and job creation are poorly connected.

Harvard Professor Ricardo Hausmann believes economic development is like a game of Scrabble, where the government supplies the vowels, the private sector provides the consonants, and the goal is to make more, longer and unique words.

Our Licence Raj harshly restricted the supply of vowels and consonants; consequently, the private sector made only a few small words till 1991. Over the last decade, the government has raised the number of vowels by reducing sins of commission (lowering regulatory cholesterol, replacing excise with GST, adopting the Insolvency and Bankruptcy Code, paying subsidies through direct benefit transfers) and sins of omission (infrastructure, health, education and national security). Our stock market is now differentiated in three ways: Complexity: India skipped the bulk job creation of mass manufacturing, but caught value creation through reverse engineering, technological skills and service exports.