Everyone now agrees. From central banks to fund managers to seasoned investors like Warren Buffett and Charles Munger. India will grow and it will grow fast. But why don't Indians themselves believe in it? As per some estimates, Indian companies are expected to require funds to the tune of US$ 35 bn from the public this year, towards capital expenditure, disinvestment etc. Let us see where the money is going to come from.
India's economy is about US$ 1.2 trillion strong. Savings by households is about 25% of that, i.e. US$ 300 bn. Indian households park about 50% of their savings in financial assets. That's US$ 150 bn. As per RBI data, investments in shares and debentures as a percentage of total household financial savings amount to about 2% of the US$ 150 bn, in bad years. That's US$ 3 bn. In good years, the investments amount to 12% of the US$ 150 bn. That's US$ 18 bn.
So India Inc. needs US$ 35 bn and it can get only about US$ 18 bn from Indian citizens. The balance must come from corporate savings and foreign investors. Given this state of affairs, is it surprising that Indian stock markets are so heavily dependent on foreign institutional investors?
We cannot entirely blame the retail investors for not showing greater enthusiasm in buying equities. The history of Indian stock markets reeks of scams and conmen. Despite the best efforts of regulators, it is hard to convince the typical middle class office going person in small town India that stock markets are not legalised casinos. Their overwhelming preference continues to be fixed deposits, even though they watch inflation eating into their interest income. Also, for a long time, investing in stock markets used to be shrouded in mystery. Before the advent of the internet and explosion of business media, the process seemed inaccessible to the common man. So, traditionally equities have not been the first option that comes to the mind of Indian retail investors.
In our view, if India has to grow it will show up in the capital requirements of Indian companies. Sure, they will be able to fund a part of it from internal accruals. But they will need a helping hand from investors. Ideally these investors should be from within India, with a genuine interest in staying invested. In return, they can expect to participate in one of the most promising asset classes anywhere in the world - Indian equities. Our advice for investors would be to do their homework, identify well managed companies they can understand and seek a reasonable entry price. But be sure to participate.