Highways to wealth
Indian individuals possessed Rs 202 trillion in wealth as of 2013 and this figure is expected to double to Rs 411 trillion by 2018 due to the existing wealth providing returns on investments and additional wealth being invested in financial households savings yearly. This includes Rs 110 trillion in financial assets and Rs 92 trillion in physical assets — real estate and gold — besides wealth held in real estate expected to double in the next three years, according to the India Wealth Report. Even as the curtains were falling on 2013, the developed world did much better in that year than in 2012 even as domestic woes increased for India, with GDP growth slowing down and seeing sub-5 per cent growths in the second half of the year after many years. Even within this context, the wealth of Indian investors continued to increase, though at a slower pace compared to a few years back, and India’s higher exposure to debt insulated it from the shocks of the equity capital markets. However, investments in real estate and gold have been the darlings of investors in recent times with gold coming out the winner as the largest asset class after debt, and real estate figuring third above equities.
‘Fixed deposits and bonds are the heroes of Indian wealth (Rs 25 trillion of which bank FDs are around Rs 24 trillion), besides insurance (Rs 19 trillion) and savings deposits (Rs 15 trillion.) However, India is a debt-oriented country and 65 per cent of Indian wealth is in debt,’ said Karvy Private Wealth CEO Sunil Mishra. Direct Equity is the second highest contributor to Indian investors wealth among all asset classes. Savings banks (offering 4 per cent returns) has Rs 15 trillion, small savings (Rs 5.6 trillion but degrown in 2013 compared to 2012), mutual funds (Rs 3.5 trillion) and alternative assets (Rs 31,553 crore).
The Indian’s affinity for gold metal, which is the highest in the world at 28 per cent of total global gold demand, has witnessed individual wealth amounting to Rs 60.61 trillion. While global gold investment declined, it shot up by 3,57 per cent in India. Real estate is another fastest growing asset wealth (set to double in the next three years). The study shows that India holds 12.9 per cent of the world’s 26.1 per cent equity and 41.4 per cent of the global 43.9 per cent debt, with investments in ‘debt instruments’ being the highest among asset classes, both globally and in India. While GDP growth is expected to remain at 5 per cent in fiscal 2013-14, growth is expected to increase at a faster pace in the next five years, according to the India Wealth Report.
Mishra told Millennium Post that the parliamentary elections — irrespective of the outcome — will stabilize these figures since some reforms — started over the past eight-nine months — would benefit the incoming Central Government. “Despite 65 years of independence, India’s economy took off only 20 years ago. Today, even affordable housing is coming up with more secondary wealth flowing into such ventures,’ he noted. Global individual wealth stood at $135.5 trillion in 2012, marking a growth of 7.8 per cent compared to 2011 and 2010, when the growth was – 3.6 and 7.3 per cent respectively. Individual wealth grew by 5.9 per cent in the old world (North America, Western Europe and Japan) in 2012 and 12.9 per cent in the New World (rapidly developing economies like the Asia-Pacific Ex-Japan, Eastern Europe, Latin America, the Middle East and Africa as classified in the BCG Global Wealth Report 2013).
North America and Western Europe remained the wealthiest regions in 2012 with total individual wealth of $43.3 trillion and $35.8 trillion respectively. The Asia-Pacific (excluding Japan) was the third largest market with a wealth of $28 trillion. Growth in overall wealth in 2012 amounted to nearly $ 10 trillion — from $125.7 trillion in 2011 to $ 135.5 trillion in 2012. The principal driver of the rise in global individual wealth in 2012 was the strong rebound in equity markets in most countries, particularly during the second half of the year. In 2012, the S&P 500 rose by 13.4 per cent, the Nikkei 225 by 22.9 per cent and the Euro Stoxx by 13.8 per cent. The drivers of stronger equity markets included generally supportive monetary policies by central banks (notably in Europe with regard to the euro) and a measure of economic clarity after national elections in countries such as the USA, Japan, China, France and Russia.
Global individual wealth is projected to post a compound annual growth rate (CAGR) of 4.8 per cent over the next five years to reach $171.2 trillion by the end of 2017. Overall, the Asia-Pacific region (excluding Japan) will account for the bulk of the increase in global wealth through 2017. Both the global population and investible wealth of high net worth individuals (HNIs) increased substantially to reach record levels in 2012. The population of HNIs grew by 9.2 both worldwide, increasing by one million individuals to reach 12.0 million. Global HNI wealth increased by 10.0 both to reach $46.2 trillion, above the pre-crisis level of $40.7 trillion in 2007 and the previous high of $42.7 trillion in 2010. North America contributed significantly to the global HNI population growth by registering the highest regional growth rate (11.5 both) to reach 3.73 million HNIs and also the greatest share of HNI investible wealth with $12.7 trillion. It regained its position as the region with the highest number of HNIs, overtaking the Asia-Pacific, which grew at 9.4 both to reach 3.68 million with investible wealth of $12 trillion.
Currently, India is home to 164,000 HNI households and ranks 15th among all nations in terms of the number of such households. In FY13, India surpassed Japan to become the third largest economy in the world in terms of GDP by purchasing power parity. The Indian economy however, experienced its worst slowdown in 10 years, with GDP rising only by 5 per cent. The economy grew by 5.4, 5.2, 4.7 and 4.8 per cent in the four quarters of FY13. The fall in the growth rate was caused by the slowdown across all sectors —agriculture, manufacturing and services. Deficient and erratic monsoon, supply side bottlenecks, alarming fiscal and current account deficits, apprehensive foreign investors, weakening exports and policy paralysis combined to pose grave challenges to the Indian economy. The economic growth rate is expected to remain at 5 per cent in FY14 while the agricultural sector, owing to a normal monsoon and growth in exports, is likely to give a boost to the economy. However, growth in the manufacturing and services sectors is expected to be subdued. The second phase of reforms introduced by the government in 2012, namely foreign direct investment (FDI) in multi-brand retail and insurance and pension funds, and phasing out of the diesel subsidy, will provide the necessary impetus for growth by improvement in infrastructure, increased taxes for the government and employment generation. With all the above factors expected to work in India’s favour, the economy is expected to be back to a better growth trajectory in FY14.
The gross savings rate in India is expected to remain at 30.8 per cent in FY14 (according to PMEAC), the same as in the last fiscal. Although India’s savings rate continues to decline, it boasts a higher rate than most emerging economies.Indian individual wealth in financial assets stands at Rs 109.86 trillion, an increase of 7.1 per cent compared to FY12. The Indian individual wealth in physical assets stands at Rs 92.06 trillion. Hence the total individual wealth in India is Rs 201.92 trillion. The NSE’s market capitalisation stood at Rs 62.39 trillion as on March 2013, marking an increase of 2.34 per cent compared to Rs 60.96 trillion in the year that ended on March 31, 2012. The equity markets performed better in FY13 than FY12.
The Indian mutual funds industry witnessed rapid growth for some years, driven by favourable economic and demographic factors including favorable stock markets, higher disposable incomes and savings, diverse choices of personal finance products, convenience of investing, high quality service delivery, well-regulated entry of professionally managed asset management companies (AMCs), and aggressive marketing coupled with proactive investor education by AMCs. In FY13, there has been a gradual shift towards investing in debt mutual funds. The total amount of individual investment in mutual funds was Rs 3.5 trillion in FY13 (according to the Association of Mutual Funds in India), an increase of 12 per cent from FY12.
Insurance constitutes 17.2 per cent of individual financial wealth in India on the basis of financial assets in FY13. India’s growing economy, coupled with a significant rise in the young working population, has a potential for development of the life insurance sector. Life insurance penetration in India is about 4.4 per cent of the country’s gross domestic product in terms of total premiums underwritten annually (according to the Insurance Regulatory and Development Authority). The Indian insurance market provides ample opportunities to domestic and international players to harness profitable avenues in the same. Individual wealth in insurance for FY13 is estimated at Rs 18.94 trillion, marking a 9 per cent growth compared to FY12.
Traditionally, Indian investors have invested in fixed deposits, with bank fixed deposits being the most favoured as stable and safe debt investments. Individual wealth in bank FDs in FY13 stood at Rs 23.82 trillion and grew 9.17 per cent compared to FY12. However, Corporate FDs provide higher interest rates and are becoming more popular. Company FDs are expected to make a strong comeback after a rise in dividend distribution tax (DDT) for debt funds. Earlier, the interest earned by company FDs was clubbed to the income of the individual and taxed at marginal rate of tax, and the dividends on debt funds (other than liquid funds) were taxed at 13.5 per cent. This prompted higher investment in debt funds, especially from people in the higher tax bracket. However, the budget for FY14 announced a hike in DDT and also increased the surcharge, resulting in an effective rate of tax of 28.33 per cent on dividends declared by all debt funds. This made investments in company FDs a better option. Individual Wealth in corporate fixed deposits stood at Rs 94.36 thousand crore, a growth of 7 per cent compared to FY12.
Funds raised by Indian firms through retail issues of non-convertible debentures more than halved to nearly Rs 17,000 crore in FY13. In FY12, a cumulative Rs 35,611 crore was garnered by 16 firms through their NCDs. One key reason for this reduction is the removal of tax benefit of Rs 20,000 under Section 80C that was provided to infrastructure bonds, affecting retail participation in this space. The total wealth in bonds and debentures stands at Rs 66,044 crore, out of which retail participation accounts for Rs 42,805 crore. The total individual wealth in corporate bonds stands at Rs 9,812 crore, whereas individual wealth held in PSU bonds stand at Rs 32,993 crore.
Savings Deposits are a popular investment option owing to their liquidity and ease of operations. Banks keeping saving accounts of individuals can be divided into two categories: scheduled commercial banks and scheduled cooperative banks. Individual wealth in savings bank deposits was Rs 15.08 trillion as on March 31, 2013, marking a 14 per cent growth compared to 2012. Small savings comprise savings made with post offices and is one of the most traditional forms of investment, especially in rural India. Individual wealth in small savings grew by 1 per cent in FY13 due to discontinuation of two of its popular instruments – Indira Vikas Patra in 2001 and Kisan Vikas Patra Scheme from December 1, 2011. The total wealth held in small savings as on March 31, 2013, was Rs 5.64 trillion and small savings constitutes 5.14 per cent of individual wealth in financial assets. Individual wealth in provident funds grew 13 per cent in FY13 compared to FY12. Provident funds constitutes Rs 5.24 trillion of the total financial wealth held by individuals in India.
On a purchasing power basis, India – at over $4 trillion GDP — is now the world’s third largest economy. In 15 to 18 years, this is expected to grow, as per various studies and estimates, four or five times. As a result, many foreign investors and the majority of global companies and businesses are making a beeline for the Indian market, which promises a booming middle class, expanding steadily in the next few decades. India’s GDP for FY13 is Rs 100 trillion and is expected to grow to Rs 176 trillion by FY18. Individual wealth in financial assets is expected to grow from the current Rs 109.86 trillion to Rs 228.36 trillion by FY18. Investment in physical assets is expected to increase from the current Rs 92.06 trillion to Rs 183.15 trillion by FY18. Hence, the total wealth is expected to more than double from the current Rs 201.92 trillion to Rs 411.51 trillion.