'Making More Indians Invest In Stock Market' Versus 'Making More Indians Rich Enough To Invest In Stock Market'

For years stock market investors have heard the popular saying that only 2 per cent of India’s population invests in the stock markets.

Investors often compare India’s low stock market penetration to the United States of America (USA), where 14 per cent of households have a direct stake in stocks and almost 50 per cent of the households have a stake in the markets through indirect means, like retirement accounts.

Investors often believe that getting more households to invest in the markets can help Indian equity markets rise further up and drive financial inclusion. Several asset management companies are quite richly valued as investors expect strong growth as more investors are on-boarded.

But is it truly possible for 14 per cent of India’s population to invest in stocks?

Probably not.

Let us focus on the segment of population that can afford to invest. The individuals who pay income taxes can be a rough proxy for this figure. There are about 5.95 crore individuals who paid income taxes for the financial year 2021.

Therefore, out of the country’s population of 136 crore people, roughly 4.3 per cent of Indians have the financial firepower to invest in the markets - a far cry from the 50 per cent figure in the USA.

While we are ignoring the people who work in the unorganised sector, it is unlikely that including them would increase the total potential investor figure to 14 per cent.

Even among the 5.95 crores people eligible to invest in the stock markets, 57 per cent earn less than 2.5 lakh per annum, implying a salary lower than Rs 20,000 per month. In contrast, only 8 per cent of these 5.95 crore people have an income of over 10 lakh per annum.

The figures make it quite obvious that the under-penetrated markets argument might not give us a true picture of India’s financial inclusion story. A better way to understand the market penetration would be to compare the people who already invest to the total number of people eligible to invest.

According to data provided by the National Stock Exchange (NSE), there are around 1.2 crore active clients, as of August 2021. The 1.2 crore active investors in a market of 5.95 crore people indicates a market penetration of 20 per cent – a figure that is quickly rising as more investors enter the markets.

But, there is still some hope.

If Indians choose to move away from asset classes like gold and real estate to stocks, the market might receive a boost. Indian households hold almost 25,000 tonnes of gold, the highest in the world. Not only does gold serve as an investment, it is also a hedge against inflation and holds cultural and sentimental value.

According to reports, the privately held gold in India is valued at $1.5 trillion. Despite government’s various attempts, the public has not monetised the gold. Rather gold’s demand has continued rising.

Similarly, real estate has long been considered a safe investment option, and has received a further boost by the black money that is often parked in real estate assets. Unlike stock markets, it is difficult for the government to detect and address black money issues in the real estate market. But in stock market returns have outperformed real estate for the last 20 years, except with higher volatility.

As shown above, the under-penetrated market argument does not really hold much water. A blind comparison to a country like the USA would not be the best way to size up the Indian market, which has completely different dynamics when compared to mature markets.

While several measures have been taken to drive financial inclusion, some initiatives, like payments banks, have not worked out as expected. The underprivileged don’t really need more financial products for investing the money they don’t have. India’s problem might not be a lower propensity for investing, but the lack of money to invest.