The high level committee on estimation of savings and investment under C Rangarajan?s chairmanship, in its recent report, has made several recommendations for improving the estimation of saving and investment aggregates of the Indian economy. These include improving surveys and designing/modifying databases while addressing areas such as treatment of currency holdings, bank deposits, coop bank deposits, deposits with NBFCs, etc.
In this context, let?s take a fresh look at where our capital market stands. Performance continues to be lacklustre. Despite electronification, opportunity seems to have remained confined to a handful, excluding a vast majority of the investing community. By leveraging the fruits of reforms and major ICT developments with implications like wider spread and reduced costs, the capital market should have ideally attracted a very large portion of India?s household savings. But what happened on the ground was contrary to the expectations.
Investments in securities nearly halved to 5.1% of total household savings in FY06 from 9.2% in FY 1994, thanks to lack of focus and a lackadaisical approach on the part of markets.
Trading patterns of both NSE and BSE suggest high concentrations in big cities, implying increasing economic disparity between urban and rural populations. In FY08, a whopping 83% of the NSE?s cash segment volume came from only three metros?Mumbai, Delhi, and Kolkata; the percentage was 69% in FY02. Similar was the case with BSE, around 80% of whose cash segment volume came from the same three cities in 2007-08; it was marginally higher at 86.16% in 2001-02.
According to the CSO, gross domestic savings? share in GDP rose to 34.8% in FY07 from 26.4% in FY03. Also, over the years, household savings pattern has seen a shift in favour of financial savings. According to the Rangarajan Committee report, the proportion of household financial savings in total household savings rose to around 47% in the past five years ending FY07 from around 25% in the 1950s. On the contrary, investments in the Indian equity market (shares, debentures, etc) fell to 3.9% during FY04-FY07 from 8.4 % in FY91. Thus, while the spread of the financial sector, particularly of bank branches, post office savings and the likes, succeeded in mobilising the rise in household financial savings, our capital market continued to remain laggard in leveraging this opportunity of increasing preference for financial savings. Measures undertaken for developing the capital market, post-reforms, were expected to divert savings from the traditional financial instruments to the capital market instruments, and shares and debentures were expected to get a boost from the reforms. But these were not to be.
Data also show that while 66% of Indian households own accounts in financial institutions such as banks and registered societies, a mere 7% own demat accounts?the only indicator of capital market investments. If we filter the numbers of duplication and similar activities in these accounts, the precise number would be much lower. What this means is that the Indian capital has touched only the tip of the huge population, with the vast majority still left untapped. It has not explored, seriously, the vast potential of rural India to work towards inclusive growth and towards making the process of price discovery more efficient.
By the end of FY04, an average Indian household was left with an annual surplus of Rs 16,139 for savings and investments. Had even one-fifth of that been converted into market investments, it could work out to a whopping Rs 66,460 crore vis-?-vis the year?s actual investments of only Rs 8,841 crore and FII net investments of Rs 45,881 crore. Obviously, outreach efforts and other market-development initiatives such as innovation of products and instruments were simply missing. Furthermore, though our national disposable incomes (13.3% CAGR) and household savings (15% CAGR) grew robustly from FY1991 to FY2006, the securities market failed to capitalise on this fortune. To the contrary, investments in shares and debentures actually declined, from 8% (of household savings) to 5%, while public preference for fixed deposits went up.
The author is chief economist, MCX. These are his personal views