Government advice for larger public investment in the stock market shows its ignorance to ground realities of the common man
Ignorance may be a bliss for India's know-all politicians in power. Otherwise, how else could a top functionary in the government advise the country's poor fixed depositors with banks and post offices to invest in the stock market for better returns? To many, such a suggestion may sound too casual, if not frivolous, considering the fact that the country is among the poorest in the world by per capita income and few have money to buy even 100 shares of seemingly 'safe' blue-chip companies enjoying among the highest profit-earning (PE) ratio in global stock markets. Imagine one investing Rs 7,000 in 10 shares, having a face value of Rs 10 each, of a reliably good blue-chip company to earn, say only Rs 70 as annual dividend. The dividend is paid on nominal value and not market value of shares. A shareholder can make or lose money on investment from trading, depending on the market price of the share on a day, for which the investor has to keep an eye on daily stock price movements. Seemingly, the political functionary's response followed a serious public concern over continuous rate cuts by the country's central bank, totally ignoring the growing consumer inflation rates. Falling bank rates brought no positive impact on industrial output or the economic growth rate.
Stock investors belong to a different breed. Only those with deep pockets and thorough knowledge of market operations, including local and international impacts on the market of all kinds of eventualities, make money. Even in highly capitalist economies such as the USA, UK, France, Austria and Germany, the common man keeps distance from the stock market when it comes to saving their hard-earned money to meet emergency needs. This is despite the fact that most rich economies offer social security to its citizens, irrespective of their colour, caste and religion. For instance, Sweden offers a host of social security measures, affordable healthcare, five weeks' paid annual leave for all, a year's maternity leave, hospital stay per night within $10 and an annual cap of $210 on prescription drugs among others. Even then, Swedish public companies, a host of them being leading global MNCs, do not attract a big percentage of the country's population as stockholders. In Germany, only 5.6 per cent of its population invests in stocks. The figure is seven per cent for Austria, 14.5 per cent in France, 23 per cent in the UK and 25.4 per cent in the world's biggest capitalist country, the USA, which houses the prestigious New York Stock Exchange (NYSE) on Wall Street. In China, less than seven per cent of its population are stockholders.
In India, the number of registered stock market investors in most states account for less than five per cent of the population. Three-year-old Bombay Stock Exchange (BSE) data, using unique client codes to identify the number of stock market investors in each state and union territory, identified only a total of 3.23 crore registered stock market investors. All investor accounts are linked to Demat account, though there could be duplication, for example with one Demat account connected to investor accounts with more than one brokerage. The exchange updates the data daily. Maharashtra alone accounts for more than one-fifth of India's stock market investors. Gujarat, Tamil Nadu, West Bengal and Uttar Pradesh are the other top five states in terms of percentage share in total stock market investors. These five states account for nearly 60 per cent of India's stock market investors. Ironically, India's stock market is substantially in the hands of foreign punters or hot money investors. The market had set new records in 2019, powered almost entirely by strong rallies in large-cap stocks. Predictably, the small and mid-cap stocks had a poor showing, weakening aggregate market performance and leaving Indian market cap growth at the bottom in the top 10 markets worldwide.
Notably, India's stock market was highly polarised as a handful of shares led the rally in benchmark indices while the majority of stocks, especially in the mid and small-cap segments, saw value erosion. India's aggregate market capitalisation in dollar terms grew just 3.43 per cent last year, the lowest among the world's major markets. Interestingly, going by the Bloomberg data, China, the world's second-largest economy, saw the highest market capital growth as on December 31, 2019. China's stock market is an exchange where shares of Chinese companies are traded. The rich Chinese love to gamble. The stock exchanges in Shanghai, Shenzhen and Hong Kong thrive on price swings. Since public participation is very low, a few wealthy investors own 80 per cent of tradable shares. They drive the price swings in China's equity market. In China, less than 20 per cent of household wealth is in the stock market. Instead, they are invested in real estate. Banks offer low-interest rates on savings accounts since the central bank keeps rates low to make lending cheap. As in India, there is hardly any social security in China. That makes workers save relentlessly to pay for their own retirement.
It is unthinkable that the country's top political dignitaries should make such confusing public statements inducing India's financially weak people to switch over from RBI-governed low-earning fixed deposits in banks and post offices to investments in stock markets and bonds. Incidentally, bonds carry a long maturity period, varying from 10 to 20 years. They are hardly suitable for small depositors. Globally, bank interest rates are linked to consumer inflation rates. Instead of advising the country's common man and small-saving community on the merit of investing in stocks and bonds, socially enlightened public representatives would do well to work on a meaningful social security package for all citizens before frequently fiddling with banks and small savings deposit rates to benefit the rich and market operators.
Views expressed are strictly personal