The focus of the UPA government on the aam aadmi is a significant break from the NDA?s ?India Shining? story. It has happened without rubbishing alternate policy options. This has provided the government with a wider policy choice that allows it on the one hand to promote the NREG that offers jobs for the aam aadmi while on the other hand to push through disinvestments that could create resentments, if not take away jobs from the same constituency.
But the government seems to be making a mistake in its posturing when it comes to disinvestment and ownership of the public sector enterprises by the common man. The department of disinvestment Web site quotes the President?s address to the joint session of Parliament in June 2009 and then the finance minister?s Budget speech in July 2009, where both talk of people?s participation in the disinvestment programme. Apparently, there is nothing amiss there. But we need to be sure whether the people really do want to own equity of listed companies.
The problem we address first is the discounts that the government offered to retail investors after the NTPC offer failed to elicit sufficient responses. Politically, this move pays no dividends. And it is bad economics.
Dealing with the economics part is easy. Since the government does not intend to give away management control of the PSUs, the disinvestment is essentially to raise capital and possibly bring in some accountability to the markets. This is best done by maximising the returns from disinvestments and selling essentially to large institutions. Offering discounts to retail investors does not achieve any of these.
To understand the political dividends of the discounts offered to retail investors, we turn to Consumer Pyramids, CMIE?s latest database on the financial well being of Indian households. Consumer Pyramids is based on a survey of a panel of 1,40,000 households. Among many indicators, it estimates household incomes, expenses, savings and investments. What is relevant for our discussion here is that it also provides estimates by the size of income and level of education of the household.
We find that as of March 2009, 58% of Indian households were investor households. These households have outstanding investments in savings instruments such as fixed deposits, post office savings, National Savings Certificates, Kisan Vikas Patras, provident funds, mutual funds, listed shares and even physical assets such as gold. Only 7.7% of the households, as of March 2009, had investments outstanding in the equity shares of listed companies. This is a small constituency to appease by giving a discount to the retail investor. More importantly, these retail investors are not even the quintessential aam aadmi. The retail investor is mostly rich and not even middle class. Typically, he is more likely to belong to the richest half per cent of the Indian households. And of this miniscule half per cent, only 17.7% have investments in the equity markets. Only 5.8% of the higher middle-income and middle-income brackets of households hold investments in listed equity markets.
The higher middle-income households and the middle-income households are far more numerous than the rich households. Collectively, they account for a substantive 36%. Their financial well-being is more linked to interest rates (higher the better) because they have a greater investment in fixed deposits. Nearly 62% of the higher middle-income households and 38% of the middle-income households invest in fixed deposits. Compare these ratios with the meagre ratios of investments in listed equity shares and you have an answer to why doling out sops to this class will not yield any political dividend and will not meet any desire to achieve socialism either. Offering discounts to retail investors is closer to cronyism than socialism. The truth is that the Sensex & Nifty are not relevant to a large proportion of households in the country.
It has been two decades since the famous ?Reliance Khazana? public issue by the late Dhirubhai Ambani that ushered the equity cult. The cult has gained a frenzied following but only in a small elite crowd. Households, at large, still prefer to keep monies safely in fixed deposits, preferably in public sector banks. Is this preference a reflection of lack of education? Consumer Pyramids suggests that this is more likely a case of choice and not the lack of education. 9% of households that have at least one graduate invest in equity shares. And 8% of households that do not have any graduate but at least one matriculate invest in equity shares. But what is surprising is that only a little less than 8% of the households that have no literates invest in equity shares. The difference in proportion of households that invest in equity shares across different levels of education is too small to blame lack of education as the reason for poor penetration of the equity investment cult. Households have a clear preference for investing in relatively safe instruments. We need to understand this preference of the households better, rather than lure them into buying equity shares of listed companies. It may not be a very good idea to even ?educate? the public on investing in the equity markets. The government would do better to focus on selling to whoever wishes to buy, rather than dragging the aam aadmi where he apparently does not wish to go.
The author heads the Centre for Monitoring Indian Economy