by Prof Vaidyanathan on 26 August 2015
Earlier we have discussed that What ails Indian Stock markets. Millions of Abhimanyus in the Indian share Bazaar 1 of 2 efficient markets provide the ability to enter and exit at all points of time, that’s about the liquidity in the market. Here we will consider about the role of individual investor in the stock market.
Firstly, we shall take a look at the pattern of Indian Equity Markets – Indians are disinclined towards the equity market, as only 5% of the Indian household financial saving is directly invested in shares as seen in the table 1, which is very meager considering the size of Indian population, they are more inclined towards Bank deposits, insurance and PF and pensions. See Table 1 for the distribution of House hold saving.
Table 1 – Composition of Household Savings 2004-05 to 2012-13 [%]
Note: From currency onwards the percentages are to Gross Financial Savings of Households. GDS=Gross Domestic Savings; GDP=Gross Domestic Product; FS=financial savings; Net claims on Govt.= Small savings in Postal systems; Net deposits= with banks Source: St. 73, 10 & 18, National Accounts Statistics 2014; CSO New Delhi
We also find that Physical savings—in the form of house etc. constitute half of total savings of the households and of the remaining financial savings bank deposits [Net Deposits] constitute nearly 60%. It shows that Indians are more Bank oriented.
Number in share Markets:
Demat account (dematerialized account) which is medium through which one can trade in listed stocks or debentures in electronic form. National Securities Depository Limited (NSDL) and Central Depository Services (I) Limited (CDSL) are the two major Demat account operators.
As per latest data, the total number of investor accounts at NSDL stood at nearly 1.4 crore (14 million), as on June 30, 2015 against 1.32 crore (13.2 million) in the same period year-ago.
CDSL reported 9.8 million investor accounts for June-end, this year – an addition of about 950,000 accounts over 8.9 million accounts in the same period last year.
Together, the total number of Demat accounts stood at 2.38 crore (23.8 million) at the end of June this year – translating to an addition of 1.664 million accounts from the same period in 2014. This 2.38 crore is out of population of nearly 130 crores(1.3 billion) – which is around 2%. This shows that meager number are only involved with stock markets.
Table 2 gives the savings made by the household sector and that of the foreign investment flows– both direct investment and portfolio investment. In spite of the noise made about the importance of foreign investment in our economy, we find that their role is between 7-14%.
Foreign Direct Investment (FDI)/ Foreign Institutional Investment (FII) in our economy is like pickles to curd rice and not the main dish. Still, so overpowering are our embedded colonial genes that it is made to appear that the entire Indian economy is dependent on foreign investment. Hence, so much discussion about them in our pink papers on each day.
Ours is a Domestic savings driven economy and even in that household savings play a major role. Actually Goldman Sachs [GS] suggests that domestic savings do play a major role in our investments.
“India’s infrastructure investment needs $1.4 trillion. But for financing such huge amount, the domestic savings generated by Indian families will suffice and India would need minimal FDI”.
– Goldman Sachs Global Economic Paper No 187 (2010)
Table 2 Savings and Foreign flows [Rs. Crores]Note: * Revised Estimates
Source: Statement 18, NAS 2014 and Table 155 Hand Book of statistics on Indian Economy Sep 2015 RBI.
We find that top ten brokers and scrips constitute more than a quarter of the cash market turnover… see Table 3. This shows that our markets are very skewed and shallow.
We also observe from Table 3 that for 2013-14 the FII share of cash market turnover was 23% with Proprietary [broker owner] and domestic institutions at 28% at NSE. The Retail, NRI and qualified foreign investors had 45% of trading in NSE.
Comparatively FII has major influence in the markets due to their decisions to buy or sell. For instance in the recent crash on the 24th august 2015 we find that the FIIs pulled out substantial amounts from the market which had impact on the indices.
Table 3 Share of Brokers Securities and Participants in Cash Market Turnover [2013-14]
- Domestic Institutions (excluding mutual funds) includes banks, DFIs, insurance companies and New Pension Scheme.
- Others include Retail, NRI and QFI. [Qualified Foreign Investors]</em?notes:<>
Source: Table 2.25—SEBI Annual Report 2013-14
Hence we find that we are essentially a bank oriented economy and our domestic savings are relatively large to sustain our growth. Household savings is large portion of domestic savings.
FIIs do play an important role in the trading in the market—at the margin- and they do constitute around 10% of our domestic investment.”
It will be a major effort to make our households participate in the stock market given the volatility and concerns about fair play. Interestingly we find that other Asian countries and Europe are also Bank oriented. Only country which is share market oriented is USA and we mistake it to be true for all countries.
As long as our retail investors are focused towards bank and other pension fund investments, their role in share markets will be relatively low.
Views expressed are personal.