Here’s how the government could offer India’s stock market some relief

While those who invest in shares directly or via mutual funds are still relatively few—India has some 180 million demat accounts and a little over 40 million mutual fund folios, with a considerable overlap between the two—the number of Indians with indirect exposure to stock prices via retirement savings and insurance policies would be about 350 million.

As something that touches the lives and welfare of a quarter of the population, particularly the relatively well-off and articulate, the stock market matters. No government can afford to be blasé about it.

So, the decline in market indices since late September is a reality that the Centre should take into account for policy decisions. Now, it is neither possible nor desirable for the government to try guiding capital flows in or out of stocks, but it can still take action in support of the market.

The best way, of course, would be to step up the pace of economic reforms, so that the earning potential of businesses goes up. Perhaps it should also take a relook at India’s capital gains tax regime, which has stiffened.

Also read: Indian stock markets: Navigating bullish trends, valuation risks, and what’s next in 2025

India is undergoing a structural change, with savings getting financialized. While the gross financial savings of households are about 11% of GDP, savings are shifting into equity holdings, a departure from the old preference for bank deposits and small saving schemes.

This continues apace, even as foreign money either moves out—whether to China’s equity market or back to higher-yielding debt and equities in the US—or enters India with caution amid some signs of froth seen in share prices as a ratio of corporate earnings.

It is this tendency of external capital to exit for greener pastures that has led the nearly four-month long slide in stock indices. While some local investors may also have turned cautious, mutual fund inflows have kept feeding shares with financial savings.

The virtue of a wobbly market is the lesson it imparts those who have never been through a long slump—that stock investment is not a one-way ticket to riches, and that prices can indeed drop, causing losses.

While investor education via real experience is valuable, such lessons must sink in gradually. Rattled first-time investors must not get scared away from this market.

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While well-known private startups have been going public, too much money is still chasing too few shares in some segments, which inflates prices beyond levels warranted by realistic expectations of future performance.

Some of it goes into the pockets of unscrupulous entrepreneurs who offload their holdings in dud companies at fancy prices. Retail inflows have let obscure initial public offers succeed, with post-listing price ‘pops’ attracting seekers of a quick buck.

Those who do not discriminate between stocks that reflect earning potential and those that float on a wave of liquidity could burn their fingers. The market also loses efficiency in its capital-allocation role this way.

To keep a good balance on that score, perhaps the government could resume disinvestment. Not high-profile strategic sales, for which India’s political class has little appetite, but the sale of minority stakes in both listed and unlisted public enterprises.

Of the Centre’s 389 such firms, just 70 are listed for their shares to be traded publicly. The money raised by selling shares could be put to good use elsewhere.

Also read: Unlisted securities: The high-stakes gamble luring India’s retail investors