Companies' Sensex tenure pared by 80% post liberalisation: Economic Survey

Higher dynamism has helped the emergence of new firms which have challenged the old order, survey notes

A Sensex company which could expect to stay in the index for sixty years before liberalisation, found its tenure cut short to as little as 12 years after India's economy opened up. One-third of firms exited the index every five years shows data from the economic survey.

Higher dynamism has helped the emergence of new firms which have challenged the old order, noted the economic survey.

“…the years following 1991 liberalisation saw the rapid emergence of new firms, new ideas, new technologies and new operating processes, causing a steep revision of the Sensex…,” it said.

Half the firms were replaced in 1996. Subsequent periods saw revisions continue. Ten firms were out between 2006 to 2010. Eight between 2011-15. And another ten exited between 2016-19, noted the survey.

Materials and consumer discretionary sectors accounted for two-third of the Sensex firms in 1986. Financials, telecommunications and the information technology were absent.

“With the entry of these new sectors, today’s Sensex is far less concentrated than the Sensex of the 1980s and 1990s, and mirrors the far lower sectoral concentration of the Indian economy as a whole,” it said.

A similar difference is seen in the relative size of companies on the Sensex. The largest firm was 100 times the smallest in 1991 in terms of market capitalisation. It dropped to 75 ten years later. It was 12 in 2018. Similarly, the largest firm accounted for 20 per cent of the total Sensex market capitalisation in 1991. It is 13 per cent in 2019.

Alongside this increased competitiveness in the economy, there is however also some evidence of crony capitalism. The survey cited brokerage firm Ambit’s index of ‘connected companies’ which outperformed the market by seven per cent every year between 2007 and 2010. This is indicative of abnormal profits extracted at the expense of common citizens, according to the survey. The index has underperformed since 2011.

Rising Churn:

-Sensex company could earlier expect to stay in index for 60 years

-Dropped to 12 years after liberalisation

-Largest Sensex firm was 100 times smallest Sensex firm in 1991

-This dropped to 12 in 2018

-Greater dynamism now seen in markets and economy