How Modi government failed to spot its biggest success story
It could have helped mend India's investment behaviour post-demonetisation.
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What is the biggest people-driven success story in the past three years? Cutting across the claims, facts and perceptions, undoubtedly, the most genuine accomplishment of recent years has been a silent and diligent synergy of small savings and the rising stock market.
In the past three years, the burgeoning middle class of small towns has been bolstering the Indian stock markets by investing in mutual funds and thus creating the much-desired small investment revolution or financial inclusion of a different kind.
The surprising element of this feat is that the government paid no heed to this accomplishment, which could have helped in mending India's investment behaviour post-demonetisation and moved people away from the black money-driven investment in gold and real estate.
Equity cult is here
Facts are aplenty. An equity culture in India is approaching the tipping point. Indian equity markets are taking fresh guard. The markets, traditionally led by foreign institutions, are being complemented by domestic investment in a befitting fashion. Going by various data sets of Indian stock markets, domestic investors bought $28 billion net worth of stocks since 2014, matching foreign investors' $30 billion inflows during the same period. This has provided an essential cushion to the markets to weather the unexpected turbulence.
The domestic fund inflows to the markets are being channelised by the soaring Indian mutual fund industry. Retail investors have been investing their marginal savings in MFs through systemic investment plan (SIPs), which is a disciplined way of investing small, but regular amounts in mutual fund schemes of choice. Since 2014, total assets under management (AUM) by the 42 SEBI registered mutual funds or asset management companies have been scaling new highs.
The government is required to rejig income tax incentives on savings in shares, mutual funds and debentures.
According to AMFI, the industry association, investment in MFs has seen a robust growth of 22-28 per cent per annum. The industry assets under management (AuM) touched Rs 10 lakh crore in May 2014 and stood at Rs 19.97 lakh crore at the end of July 2017. Households accounted for 48 per cent of all mutual fund assets as their investments in equity schemes jumped by 50 per cent during the same period. Small towns are leading the surge where investments in mutual funds rose by 40 per cent. Small town investors also committed 55 per cent of their assets to equity.
As real estate and gold are fast losing on the returns, domestic investors helped Nifty give an average annual return of 11.97 per cent ( more than any other asset class) during the last three years.
The dark spot
The story of the emerging equity cult is exciting, but it also comes with its inherent risks. In the past three years, powered by turbocharged liquidity (foreign and domestic) and rising expectations from the new government, Indian stock markets leaped vertically rather than horizontally. The valuations of the stocks (vertical) have kissed the sky while the base and depth of market have not grown in the similar fashion.
This has created an overconfidence or optimism bias under which liquidity is chasing stocks irrespective of macroeconomic fundamentals.
As macroeconomic realities have started biting amid global headwinds, the small investment fest sadly lacks proactive policy support from the government.
1) Primary market or corporate equity offerings (IPO) did not come up to the expectations of the ongoing bull run. The total number of issues and amount raised by IPOs in the last three years is still below the levels seen between 2009 and 2011, the recent best years of primary market, according to data from the Prime Database, the primary market tracker.
The government was expected to nudge companies for increased public offerings through policy instruments along with fast-tracking divestment of public sector companies. Consistent flows of fresh equity offerings are necessary to widen the base of the equity market. It goes without saying that equity-financed industrial investment reduces the dependence on bank credit and makes companies transparent and participatory.
2) In spite of repeated warnings from SEBI, several companies are dodging minimum public shareholding (MPS) norms, which stipulates that a listed company must have at least 25 per cent public shareholding. As many as 1,886 companies are non-compliant to the MPS norms. Out of the 1,886 firms, 1,795 firms are private sector listed companies as per data compiled by Capitaline.
The government must coax or prompt these companies to go for equity offerings in order to broaden and deepen the stock market.
3) India's household savings fell to a two-decade low to 18.6 per cent in FY17, from a peak of 25.2 per cent in FY10. Once popular government-sponsored small savings schemes (NSC, PPF) lost traction after the government decided to do away with interest subsidy on them by linking them to government treasury bill yields.
The fall in household savings could be compensated by propping up the investments in financial market. Consequently, the government is required to rejig income tax incentives on savings in shares, mutual funds and debentures.
If boosted with appropriate policy vitamin, the expanding equity cult can help in altering the wealth metric of Indian society. India enjoys a traditional bias towards physical assets, over financial investment. As per the latest credit Suisse Global Wealth Report, 2016, financial assets in India account for around 10 per cent of total wealth against 51 per cent, 53 per cent and 72 per cent in UK, Japan and USA, respectively.
The ongoing small investment enthusiasm requires proactive, innovative and consistent policy support to nudge Indians to shift away from the black money intensive physical assets. This is the only way through which the government can offer solace as a follow-up to the so-far botched demonetisation.