Is the Sensex a good representative of the economy?

How justified is it to base the entire economy and its growth on the Sensex, which itself is based on 30 odd companies of the country? In my view, only 30 companies can't represent the growth of an economy. What is your opinion?
- Arun

I agree with you that these 30 companies do not represent our economic growth entirely. Further, they are not dominantly representative of our economy as a whole. They are only reasonable representative of our markets and our markets do not represent our economy, as we have a sizeable unorganised sector and other dimensions, which are also a part of our economy.

If you look at one of the largest businesses in the country - Indian Railways - it's not structured as a publicly-traded business. Also, even the Sensex is a little skewed, as about 35 per cent of the revenues of all the companies within the Sensex do not come from India; they come from the export of technology, pharma, etc.

So, given all these, you will see such disconnections. However, loosely speaking, if the economy does well, we expect our markets to do well and vice versa. Also, the remaining 65 per cent of the Sensex might be reflective of this interpretation. We see both the struggles and thriving performances of different sectors being reflected in the Sensex constituents. So in that sense, it is a very rough barometer and not a precise measurement.

This article was originally published on March 17, 2020.