The last eighteen months have been a peculiar time for Indian financial markets and its participants. We saw one of the most serious market corrections during this period followed by a strong unidirectional bull run. The way the markets have moved since the crash of March 2020 has only widened the gap between market conditions and the broader economy. This is not an encouraging sight and is naturally unsettling for investors and traders.
Ever since the first wave of the pandemic, India has seen heavy addition in the number of retail market participants. In India, less than 5 per cent of the population is directly or indirectly exposed to financial markets. However, this seems to be changing progressively. According to a State Bank of India (SBI) report, the number of individual investors in India grew almost 14 million in the FY21. The sustainability of the trend needs to be examined because extreme volatility might push a majority of retail participants on the sidelines as there is a sense of income beyond disposable limits being deployed (in the stock market). Also, empirical data suggests that market upside has a direct correlation with the number of demat account registrations.
While equity markets have been optimistic lately, India’s economic condition has been deteriorating on multiple fronts. Even before we stepped into the pandemic, our economy was facing issues around inflation and balance of trade. The Covid-19 pandemic accentuated some of these and industrial productivity took a severe hit.
Many things have changed due to the pandemic. One aspect that has changed completely is trade and commerce between nations. The crisis has made economies, both developed and developing, realise the importance of self-sufficiency. This has triggered a transformation on the globalisation front and compelled leaders of states, especially the dependant economies, to focus on organic growth opportunities. The Asian economies which attained the status of ‘developed’ did so by exporting heavily. They maintained good association with outside stakeholders and built sustainable trade relations. This helped them achieve growth. Going forward, replicating something similar would be difficult for two main reasons. Firstly, trade dependency with outside stakeholders will tend to reduce and, secondly, production challenges may lead to a temporary imbalance in consumption behaviour.
India, in its journey to reach the $5 trillion economy mark, will have to exclusively focus on improving the overall business ecosystem. The administration needs to focus on the ease of doing business in order to encourage entrepreneurs and investors across the globe to work with India and in India. The complex systems and processes act as bottlenecks when it comes to hosting new and diversified players. The anti-China sentiment across the world, due to multiple reasons, has led global powers to look for the next best alternative. Proactive measures like the Production Linked Incentive (PLI) Scheme are noteworthy as they encourage global manufacturers to get associated with our economy and increase value creation. We are at the crossroads and accelerating the change right now will set us up for benefits in the future.
Investor View
The heightened consumer inflation has begun to unsettle quite a lot of stakeholders in the system. While economists argue whether this inflation cycle is temporary or not, retail and institutional investors are actively focussed on smart investing, which would help them generate returns over and above the upper band of the inflation range. Ever since the onset of the pandemic, the level of awareness concerning personal finance has increased. This is important for our economy given that a large chunk of the population continues to park its money in inefficient asset classes that do not return even the average inflation rate. Investors have also started to actively seek financial consulting and opt for the formal route. It is encouraging to see people do their own research before they commit to an investment.
As far as the target of becoming a $5 trillion economy is concerned, there are major structural changes that we, as a nation, need to undertake. Foreign capital is a crucial aspect of any developing economy and the more we encourage global investors to park their money in India, the easier it would be for the state to solidify such relationships.
A recent encouraging move is start-ups gearing up for listing on bourses. This will add diversification to the markets. In fact, this is one area of progress that we have made as an economy, as far as the ease of doing business is concerned. In the past, we have seen local companies unwilling to list on Indian exchanges due to the complexity of the processes involved. However, the markets regulator, the Securities and Exchange Board of India, has taken an initiative to simplify some of these processes and that has given confidence to younger businesses to consider public markets as a viable option. Speaking of which, the Indian private market has taken some positive cues from the public market, as it has become fairly interesting in the last few quarters given the surplus liquidity across the globe. We have seen a rise in the number of deals in the private markets since the first quarter of last year and at high valuations. Whether this is an anomaly or a new normal, only time will tell.
To conclude, I believe that India can very well attain the $5 trillion mark with focussed efforts towards important and visible pain points. Given the speculations around a third wave of the Covid-19 infections, we should prepare ourselves for any uncertainty and build adequate buffers. As a community, it is important to understand that normalisation is a process and not an event. It is supposed to be gradual and rushing it with tools such as external stimuli may not provide adequate support. With better healthcare facilities, it is possible for us to manage adversities and keep them manageable. Business houses must also be held accountable for inflicting any damage on the environment as they use societal resources to run their daily operations. They should take up the initiative of enhancing the environmental conditions that, in turn, would benefit all stakeholders. All in all, the pandemic can be viewed as a good reset button for all of us, allowing us to re-align our focus.
(The author is Co-founder at Zerodha and True Beacon)