The Sensex hit a record high of 52,235 on February 15 and has since then been yo-yoing but within sight of 50,000. That is almost a 100 per cent increase from the levels of end-March 2020 when the Covid-19 lockdown started. When compared with the levels seen before the lockdown, the Sensex is only 25 per cent higher, which is still a huge return compared to the growth in other assets and labour incomes. In the same period, GDP actually declined and many people lost their jobs or suffered income losses.

There are multiple reasons for the stock market boom, ranging from abundant liquidity due to monetary stimulus, economic recovery following the fiscal stimulus, progress on the vaccine front, and improved corporate profits. These factors are not unique to India and can explain the soaring stock markets across the world — from the Dow in the US to the Nikkei and DAX in Tokyo and Frankfurt, respectively.

There is a need to expand access to financial markets so that more people can enjoy the benefits. The first set of people who directly benefit from the stock market boom are shareholders — both business owners and investors whose wealth increases.

The second group that stands to gain are listed companies (or large firms) that can use this opportunity to reduce debt or fund growth. Finally, there is the government for which this is the best time to sell its stake in public sector units (PSUs) and use the proceeds for economic recovery. But what about ordinary households?

Rich-poor divide

Through the Covid-19 pandemic it has been observed that the income and wealth gaps between the rich and the poor have widened across the world. This trend started even before the pandemic because of reasons such as automation, changing skill requirements, technology that enabled hiring of remote workers and emergence of monopolistic markets due to winner-takes-all business models.

The inequalities have accentuated during the pandemic and may worsen in the coming years on account of the different nature of work done by the rich and the poor, disparities in their access to technology, and different extents of disruption in schooling suffered by their children which will leave lasting effects. Nowhere is this inequality starker than in wealth effects.

One of the ways to arrest this trend could be by broadening capital ownership, especially in poor countries, so that wage earners are able to supplement their income with financial returns. The RBI’s Report on Household Finance (2017) noted that the level of capital ownership in India is much lower than in developed countries, particularly in lower wealth quintiles. For instance, only 55 per cent of the poorest households held any financial assets (including bank deposits) as per data from 2012, while the figure was close to 100 per cent for developed countries.

For recent trends, the CMIE’s consumer pyramid survey (a large-scale survey of 1.74 lakh Indians) was analysed for September-December 2019. It was found that among those who reported surplus savings, only 1 per cent confirmed investing in equity or mutual funds and this figure fell to 0.87 per cent in September-December 2020 period.

Secondly, the CMIE data show that even if equity is ignored, Indians hardly invest in any of the other financial options such as bank fixed deposits, post-office instruments, provident fund, insurance or even chit funds. Out of the 13 categories of assets surveyed by the CMIE (excluding cash and savings accounts in banks), the majority of respondents hold only two assets. The most popular options are insurance, provident fund and chit funds. Surprisingly, bank fixed deposits are only the sixth most preferred category for investing.

Diversify portfolio

Finance theory suggests that all households, no matter how risk averse, should hold some equity as long as the equity premium is positive. Also, the household financial portfolio should be diversified across assets. But it appears most Indians do not invest in equity and even when they have surplus savings, they do not diversify enough.

Such ‘investment mistakes’ have been documented in the emerging discipline of household finance and linked to a lack of opportunities or awareness, prohibitive participation costs (time or money) and financial attitudes.

To tackle the first issue, market regulators and industry bodies must intensify their communication efforts. The “Mutual Funds Sahi Hai” campaign of the AMFI is a good initiative that can be emulated by other sectors. The challenge of participation costs can be overcome by innovative products that lower entry barriers for ordinary people. A good example is Zerodha which has become the market leader in brokerage in a short span of time, thanks to its easy-to-use platform.

There’s a need for regulatory nudge towards simpler products, more disclosures, fairer treatment of customers and default investment options (example, fixed deposit sweep-in or insurance bundled with savings accounts). On the fiscal side, the government can introduce a more progressive tax structure for investment income and provide higher deduction on employer contribution to NPS.

Finally, higher levels of financial literacy among citizens is required to improve their appetite for investing. Financial education can be integrated into the school curriculum to inculcate the habit of financial planning at an early age. Wider retail participation will eventually help to deepen financial markets, increase savings rate, reduce cost of capital, promote growth, diversify risks and, most importantly, improve the average household’s well-being.

The writer is Professor of Economics, IIM Kozhikode. The article is based on a presentation made at the Madras Institute of Development Studies

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