National agenda to bring $100 billion of domestic household savings in capital markets in next five years
(Rajiv Deep Bajaj is the Vice Chairman and Managing Director of Bajaj Capital Ltd. The views expressed in this column are his own and do not represent those of Thomson Reuters)
India is an attractive investment destination for foreign institutional investors, due to its vibrant economy, favourable demographics, high growth potential and well diversified capital markets. In fact, the benchmark Nifty has representation from 10 broad sectors, four with weightage in double digits.
One will find very few markets in the world with such diversity. Still, the irony is that our domestic retail investors don’t consider capital markets as an avenue for long-term wealth creation. The statistics speak for themselves. Household savings flowing in domestic equity markets is practically negligible.
In the last five years ending 2012/13, only 742 billion rupees of household savings has flown into capital markets, constituting only 1.5 percent of total household financial savings, 0.6 percent of gross domestic saving and a meagre 0.19 percent of GDP in this period.
This can change. We can very easily see household savings worth 0.75 percent of our GDP flowing into equity markets in the next five years. This adds up to roughly $100 billion (with the rupee at 60 to the dollar) of domestic money in capital markets in the next five years, about $20 billion every year, enough to absorb any FII induced volatility to a great extent.
This may sound daunting if we ignore the fact that during 1990-91 to 1994-95, household savings to the tune of 1.07 percent of GDP flowed into capital markets annually on average, while in the five-year period ending 2007-08, average annual flows were about 0.83 percent of GDP. Today, we are sitting on the strongest political mandate in three decades and that too for a government that is focused on growth and economic revival.
The action points are simple. Indian households have put in an aggregate $235 billion in provident and pension funds since 1970-71. In the last five years (ending 2012-13), approximately $107 billion have gone into retirement savings. Even if 30 percent of the retirement savings in next five years were to flow in equities, it would mean inflows of about $40-50 billion in the next five years. Retirement funds have not found their way into equities so far, despite the government allowing investing a part of it in equity markets.
On the other hand, the National Pension Scheme (NPS), a novel concept similar to the Superannuation Fund in Australia and 401K in the United States, was launched in 2004 but has failed to take off due to low commercials and its voluntary nature. The global experience is that people do not commit to long-term retirement and social security provisions unless it is mandated by law. NPS allows people to invest a certain portion of their retirement savings in equity markets, as per their choice. It can be made mandatory for all employees and employers should be allowed to match employees’ contribution and get a weighted tax deduction on the same.
We need to promote equity culture in India. Equity investments are a reliable source of long-term wealth generation. In Europe and the Americas, households prefer to put in 25-50 percent of their savings in equities. In India, the share is dismally low at around 3-4 percent. We have avenues like Mutual Fund Systematic Investment Plans (SIPs) where millions of people have already achieved substantial wealth creation by participating in capital markets using the services of professional fund managers.
We should encourage households to start long-term SIPs in diversified equity mutual funds. The government can play its part by giving additional tax incentives on such SIPs. Simultaneously, funds lying idle in various investor education or protection funds can be utilized for creating awareness on SIPs.
As per estimates, Indian households, religious institutions and trusts hold 31,000 tonnes of commercially available gold, worth $1.4 trillion at current prices. This money can be easily brought into capital markets by incentivizing households — by way of gold bonds — to convert their gold holdings into capital market instruments.
A part of the gold so exchanged can also be sold to gold refiners who currently need to import gold (thereby putting pressure on current account deficit and currency) to meet their export needs and the domestic consumption demand.
These simple steps can revolutionize the saving and investment pattern of Indian households and bring much-needed domestic household savings in capital markets.