We all tend to overestimate growth in the short term and underestimate growth in the medium to long term. Soon after the economic reforms process started, a few of us had estimated that the daily turnover in Indian capital markets—then in the region of Rs100 crore—would probably double in two years and reach around Rs2,000 crore in 10 years. It took longer than two years to reach the Rs200 crore mark. But in 10 years, the daily turnover on the Indian stock markets had crossed Rs1 trillion.
It is this learning that forms the basis of my belief that in the medium to long term, the Indian capital markets are poised for great growth —maybe higher than other financial services. Allow me to share some numbers to illustrate this point.
In the last 10 years, annual household savings in India have gone up from around $100 billion to $260 billion. Around 40% of this is held in physical assets (real estate, gold and the like) and the rest in financial assets. Now, out of this, $150-odd billion of financial assets, 60-70%, is kept in bank deposits ($90-100 billion). The insurance sector, including unit-linked insurance policies (Ulips), accounts for $33-38 billion. An additional $10 billion is held in cash, and the approximately $10 billion remaining comes into the capital markets either directly, through initial public offerings (IPOs) or the mutual fund route. This means that 8-10% of total household savings in India ($22-26 billion) is currently coming into the capital markets either directly or through the mutual funds or Ulip route.
In the future, a combination of demographics and economics is going to propel the demand for capital market products. It is estimated that by 2015, Indian household savings are likely to touch the $450 billion mark, with some $300 billion in financial assets.
Meanwhile, there is a huge pressure building up on the generation that will look at retirement between 2020 and 2030. This is because there are no organized social security or pension services available in India. And the two institutions—public sector undertakings (PSUs)/government and families—that traditionally provided some social security are under stress. The PSUs/government is moving from an assured pension for life to a contributory model. Changing social dynamics means that children looking after old parents is no longer necessarily true. The generation that retires between 2020 and 2030, therefore, has to start doing some serious retirement planning. Investments in capital markets, with their historical post-tax returns of 15-18% compared with all other financial assets, which have given 5-8% returns, are the only real option to build a nest egg.
At Edelweiss, our belief is that by 2015, the amount of household savings coming into the capital markets from all routes will grow almost threefold to $70-85 billion. In addition, overseas investment in all forms is also likely to double to around $20 billion. We are then talking about a total of $90-100 billion—that is, four-five times the present levels—flowing into the capital markets per annum. By all accounts, this will be a game changer for the Indian capital markets.
Of course, a few policy and regulatory initiatives are needed. We need to continue to administer the markets in a manner that the faith in them remains high. Second, financial products addressing specific savings needs—from corporate bonds to real estate investment trusts (Reits) to structured products—need to be developed. Third, the endless duplication of know your customer (KYC) norms needs to be eliminated, and we need to move towards electronic trading of products such as mutual funds and insurance.
The Indian capital markets are on a cusp of explosive growth. If the economic growth and market-friendly policies continue, all of us could well be making the same mistake of underestimating their medium- to long-term growth impact, as my friends and I did about two decades ago.
Rashesh Shah is chairman and managing director of Edelweiss group.?Comments are welcome at firstname.lastname@example.org