In recent years, India has emerged as a prime focus of interest for international investors. This interest has risen along with Indian share prices. The benchmark Bombay Sensitive Index, or Sensex, which first hit the 6,000 line in February 2000, took over five years to climb to 7,000. Then the 1,000-point milestones began falling quickly, in periods of months or weeks. In early January 2008, the Sensex pushed above 21,000.
The Sensex then was caught in the calamitous downdraft of the global financial crisis. It hit a low of 8,160 in March 2009 but was back above 17,000 at year-end. In late 2010, the index briefly touched the 21,000 line again, though the early months of 2011 would see it dropping once more. In early
March, the Sensex was in the mid-18,000 range, a level that still put it some 90 percent higher than at the start of 2006.
International investor sentiment toward India has been buffeted in recent months by concerns about regulatory and tax conditions in the country. One factor has been a growing controversy involving alleged corruption in the government’s allocation of spectrum for cellphone services. Another has been a legal fight over the British company Vodafone’s tax liability stemming from its acquisition of telecom operations in India.
Still, while China has occupied a greater share of world attention with its spectacular economic growth and share price rises more dramatic than India’s, there are sound reasons to regard India’s market as the better long-term bet. For one thing, India, reforming from decades of a comparatively mild socialism, is much less burdened by a legacy of state-owned companies such as remain a substantial presence in China’s economy.
Moreover, India holds an advantage regarding political risk. China’s authoritarian system provides a formidable appearance of stability but few means of assessing what internal tensions and popular discontent may be bubbling beneath the surface. India’s democratic system, for all its noisy fractiousness, enjoys a wide public consensus that its constitution and governmental institutions should not be scrapped for something else.
India has one of the world’s longest histories of securities trading, distinguishing the country from many emerging markets in which trading began only in recent decades or resumed after long periods of inactivity. As far back as the late 18th century, there seems to have been trading of debt securities of the East India Company, then the de facto government of the country (prior to formal colonization by Britain in 1858).
By the 1830s, the market expanded to include trading in bank shares. In the next few decades, limited-liability laws opened the way for transactions in a broader variety of corporate issues. Much as American stock trading took root by a Wall Street buttonwood tree, India’s nascent market grew alongside the banyan trees near Bombay’s Town Hall.
The American Civil War sparked a surge in demand for Indian cotton to replace the disrupted American supply. This brought about a bubble in Indian share prices that promptly collapsed when the American conflict ended. Brokers, having briefly enjoyed popularity, now were viewed with irritation, sometimes even roused by the police from their trading areas. Seeking to protect their interests, they worked to develop a formal stock exchange.
In 1874, the brokers found a permanent place on what came to be known as Dalal Street (Brokers’ Street) and in the following year they organized as the Native Share and Stock Brokers Association, which eventually was renamed the Bombay Stock Exchange. In 1908, an informal market in Calcutta became the Calcutta Stock Exchange.
By the time India became independent in 1947, there were seven stock exchanges around the country, and the number of listed companies was over 1,100. However, growth in equity trading in the early decades of independence was slow, reflecting modest rates of economic expansion and a heavy government hand on financial markets. A 1957 wealth tax put a damper on trading, for instance, as did a dividend freeze the next year.