One positive spin-off from the demonetisation of high-value currency may be that it will nudge Indian households into making the long-awaited shift from physical to financial assets, and from guaranteed-return investments to market-linked ones. Some evidence of such a shift is already available from the inflows into mutual fund schemes and insurance products in the month of November. Data from the Association of Mutual Funds of India shows gross inflows into equity mutual funds, at Rs 22,816 crore, spiking by about 27 per cent compared to October despite gyrating stock prices due to the US elections and demonetisation. Latest insurance industry data reveals that adjusted life insurance premia from individual buyers jumped by 40 per cent in the month of November, compared to a 20 per cent growth rate from April to October 2016 compared to the same period last year. Market-linked plans from private insurers and annuity plans from the LIC gained popularity.
If sustained, this shift in savings patterns can be quite beneficial to the economy. Sustained retail flows into equity mutual funds and unit-linked insurance plans can vest domestic institutional investors with greater clout in the stock market. In fact, it is thanks to big-ticket buying by the domestic institutions that Indian equities have proved so resilient to Foreign Portfolio Investors (FPI) selling equity worth $2.8 billion in November. Further, the willingness of bank deposit investors to actively explore options such as immediate annuity plans and debt mutual funds for better returns, suggests that banks can no longer take their CASA (current account savings account) customers for granted and effect rate cuts at will. If they slash rates too steeply, savvier customers can and will switch their surpluses to alternative avenues, with the click of a mouse. Three, the flow of savings away from unproductive physical assets as well as banks to newer market participants can help broad-base lending in the economy. Banks, burdened by a bitter experience with bad loans, are currently wary of fresh lending. But mutual funds and insurers, without this baggage, may be more willing to lend to riskier borrowers.
With RBI data showing that Indians park a measly 4 per cent of their income in shares, bonds and pension funds, this trend can certainly benefit from a policy push. Two specific policy fixes can help. The tax regime for financial investments is way too complicated with different instruments within the same asset class, and even different kinds of return (dividends and capital gains) subject to varying tax rules. Simplifying these rules can help draw more retail investors into financial products. The on-boarding process for first-time investors to access stocks, bonds and mutual funds is also way too complicated, with repetitive checks under the pretext of KYC (Know Your Customer). Applying the lessons from the PM’s Jan Dhan Yojana to all financial instruments can make sure that savers who are just now dipping their toes into financial products, have every incentive to jump in.