One of the most keenly watched equity indices of the world, the S&P BSE Sensex turned 30 this month. The index, composed of 30 important stocks, representing ‘large, well-established and financially sound companies across key sectors’ according to the BSE’s website, continues to be an important barometer of the Indian economy, 30 years after it was first launched in October 1986.

The journey of the Sensex over the past 30 years in many ways mirrors the evolution of the Indian economy over the past three decades. When it was first launched in 1986, India was arguably taking baby steps towards economic liberalization, the big push for which finally came in 1991.

In the 1985 Union Budget, the government indicated its intention to open up India’s economy. Among the many incentives to promote trade, 50% of business profits attributable to exports were made income tax deductible, with the concession extended to 100% of profits in 1988 even as other moves were initiated to reduce the scope of the license-permit raj which had flowered under earlier regimes.

According to several scholars, the early 1980s marked a turning point in the evolution of the Indian economy, with a pro-business tilt by India’s political class which led to an acceleration of India’s growth rates.

According to a widely cited 2004 study by the Harvard University economist Dani Rodrik and India’s chief economic advisor, Arvind Subramanian, India’s transition to high growth occurred well before 1991, ‘triggered by an attitudinal shift on the part of the national government towards a pro-business approach’. The Princeton University political scientist, Atul Kohli drew similar conclusions in his 2012 book Poverty Amid Plenty in the New India.

The birth of the Sensex, in many ways, mirrored the rising hopes of Indian businessmen and investors about the emergence of a new and more dynamic economy in the years to come. These hopes were rekindled by the big-bang reforms of 1991. If most reforms of the 1980s were pro-business rather than pro-market, 1991 marked a decisive embrace of several pro-market reforms. The changes in the stock market, and the composition of the Sensex in the early 1990’s partly reflected the tumultuous changes sweeping across the Indian economy during that period. As an earlier Plain Facts column had pointed out , the reforms of 1991 exposed the then-established business houses to competition, while paving the way for the rise of entrepreneurial companies in newer areas such as software, pharmaceuticals and infrastructure.

Thus, the Sensex underwent a major overhaul in 1996, with 15 of the then existing 30 stocks being replaced by a new set of scrips. As the chart below shows, the 1990s saw a big churn in the composition of the Sensex.

The overhaul of 1996 saw the exit of a number of industrial heavyweights from the index. The likes of Cummins India, Ballarpur Industries, Premier made their way out. The outgoing 15 stocks could be classified as either being industrial stocks or ‘materials’, i.e. cement or fertilizers, or ‘consumer discretionary’ such as electronics companies. The companies that made their way into the Sensex in 1996 were a much more diversified lot, with financial firms such as the State Bank of India and ICICI Bank accounting for the largest number of entrants. The telecom sector found its representation in MTNL, while Ranbaxy joined GlaxoSmithKline in the pharmaceuticals space.

Ever since the major overhaul in 1996, the components of the S&P BSE Sensex have been periodically revised to reflect the changing fortunes of different companies. However, the churn in the Sensex constituents has never been as dramatic as it was in the late 1990s.

Nevertheless, the composition of the Sensex has continued to evolve over the past three decades. As the chart below illustrates, the share of knowledge-based companies, including those engaged in information technology (IT) and pharmaceuticals has been rising over time. The share of manufacturing has declined even as that of the financial sector has increased.

These changes have made the Sensex far more diverse today than it was in 1986. In 1986, the Sensex was dominated by four sectors—materials (cement, metals, fertilizers, etc.), consumer discretionary, industrials and consumer staples. Over the years, the number of sectors represented in Sensex has increased.

Even as the Sensex has tracked the Indian economy through its transitions over the past three decades, it has seen its influence rising over the years as its constituents have come to play an increasingly greater role in the Indian economy. As the chart below illustrates, the contribution of Sensex companies to India’s economic output has risen significantly since the beginning of the 21st century.

The turnover at the S&P BSE Sensex companies amounted to 7% of India’s gross domestic product (GDP) in the 5 years from 2000-01 to 2004-05. This ratio has increased to 19% over the last five years. However, with the GDP of the country essentially measuring the gross value added in the economy, the gross value added by Sensex firms offers a better picture of the extent of the contribution of Sensex companies to India’s GDP. Despite a slight fall in the turnover of Sensex companies, as a proportion of India’s GDP, the estimated share of value-added by these companies has remained more or less constant at around 11% of GDP over the last five years. In other words, over a tenth of India’s output is attributable to the top thirty companies today.

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