Economic Survey 2024 talked in details the significant increase in retail investors and the rising trend of speculation in the stock market. While noting that the market capitalisation of the Indian share market has seen a remarkable surge, with the market capitalisation-to-GDP ratio now being the fifth largest in the world, the Economic Survey called for 'careful considerations' given higher retail participation.
"Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading. However, globally, derivatives trading loses money for investors, for the most part," the survey noted.
The Economic Survey said raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading.
A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives. "Investors’ behavioural response would be to feel ‘cheated’ by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy," it noted.
The survey called for careful considerations because the possibility of overconfidence leading to speculation and the expectation of even greater returns, which might not align with the real market conditions, is a serious concern
As per the survey, individual investor's share in the equity cash segment turnover was at 35.9 per cent in FY24. The number of demat accounts with both depositories rose from 1,145 lakh in FY23 to 1,514 lakh in FY24. The impact of this influx of individual investors in the market is also reflected in new investor registrations with the exchanges, their share in total traded value, net investments, and ownership in the listed companies.
For instance, the registered investor base at NSE has nearly tripled from March 2020 to March 2024 to 9.2 crore as of 31 March 2024, potentially translating into 20 per cent of the Indian households now channelling their household savings into financial markets.
A rise in retail participation was more substantial and steadier through the indirect channel via mutual funds. FY24 has been a spectacular year for MFs as their AUM of the MFs increased by Rs 14 lakh crore (YoY growth of 35 per cent) to Rs 53.4 lakh crore at the end of FY24, boosted by mark-to-market (MTM) gains and expansion of the industry. The total number of folios increased from 14.6 crore at the end of FY23 to 17.8 crore at the end of FY24," the survey noted.
The Survey said the increased retail participation in financial markets and familiarity with financial products are beginning to grow in line with India’s emergence as the world’s fifth-largest economy. Therefore, firms operating in banking, insurance, and capital markets must keep the interests of the consumers in mind and improve their service quality through fair selling, disclosure, transparency, reliability, and responsiveness, it said.
"Their internal appraisal and incentive systems must be in alignment with these considerations. It is in their interest and in the interest of the nation that they optimise their commercial goals over the long run," the Economic Survey said.
The survey said in a developing economy such as India, the financial sector needs to support the banking sector and fill the gap in capital required for the economy's growth.
"Therefore, the financial sector should expand at a pace that is in lockstep with economic growth. In particular, India can ill-afford the economy's over financialisation at its current development stage.
Recently, there were reports that Union Budget 2024 could announce changes in long term capital gains tax or announcement of uniformity of holding period among a few asset classes. The Finance minister Nirmala Sitharaman at a recent BSE event cited risks pertaining to unchecked retail participation in the futures & options (F&O) market, with a few media report suggesting F&O income could be tagged as 'speculative' against 'business income' at present.