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Indian stock markets look like ‘mushroom rocks’, top-heavy and finely balanced, waiting to be toppled by bad news, of which there are plenty. Investors, whose shares are part of the ongoing bull run starting in February 2021, could not care less that they have gained Rs.11 trillion since May 24.
This abundance of wealth gains, for the less than 15 percent of households that own shares, contrasts with the increasing poverty for most others resulting from the economic and health looting of the second wave of Covid-19 and its mutants.
However, it is hypocritical to roll up our sleeves because a few have gotten richer while the majority, especially those in the bottom three quintiles, are struggling. Gunnar Myrdal “hash tagged” India as a “dual economy” in 1968, in his seminal work Asian drama.
Admittedly, a lot has changed since then. The urban, modern part of the economy has expanded considerably, but so has inequality. The rapid increase in wealth at its peak – a result of the 1992 liberalization that unleashed entrepreneurship and economic growth – remains unmatched by higher living standards for the middle class, although, until the pandemic hit, poverty in the bottom two quintile had declined significantly. .
The stock market is not a useful measure of economic prosperity. It follows the well-being of an elite minority in the formal sector, albeit with advancement benefits. But it is a real-time, highly visible measure of government performance in partially liberalized economies such as India, where the government continues to be an intrusive economic agent through state-owned enterprises and financial institutions, regulated pricing and capital allocation regimes.
India’s exchange rate regulator – the Reserve Bank of India (RBI) – aims to keep the exchange rate stable, with the exception of adjustments that reflect the difference between currencies in inflation, which RBI is required to maintain within a float of two percentage points below or above the standard of four percent per year. Currently we are scraping the bottom of the upper bound.
Sound inflation management and economic growth attract foreign investors, who have invested Rs.25 trillion in India or 13 percent of the market capitalization. These funds are important. They help us close the currency gap because we chronically export less than we import.
The ecosystem in which stocks are traded and fortunes are made or lost has been regulated by the Securities Exchange Board of India (SEBI) since April 1992. On the demand side, there are 41 million registered investors – individuals and entities – of which 9,823 are foreign portfolio investors and 45,000 are domestic companies. On the supply side, 5,600 companies supply the bonds and stocks that are publicly traded through 1,343 stock brokers. More than 400 portfolio management entities and mutual funds mediate the flows.
The market cap of Rs.212 trillion was 107 percent of GDP in 2019-20 at current prices and about 2.4 percent of global market capitalization (SEBI 2019-20).
The Bombay Stock Exchange was the first. It has been operating since 1875. Since then, 20 other exchanges have been established, but these have either voluntarily closed their stores or as the Calcutta Stock Exchange is pending a lawsuit to do so. At that time primary goods such as opium, indigo and cotton were traded.
Today Bombay is Mumbai, and the renamed BSE no longer deals in commodities, for which there are specialized exchanges. 84 percent of the capital raised in 2019-20 came from telecom, financial and electronics-related companies. In 1992, the National Stock Exchange (NSE) became a competitor for domestic trade.
Equity markets, however, remain quite a clubby business. Of the Rs.0.8 trillion in equity raised in 2019-20, only 12 companies accounted for 95.7 percent, while 64 others accounted for the remaining 4.3 percent.
Also keep in mind the limited geographic spread from which the funds are drawn. BSE collects 51 percent of the money from Mumbai, 17 percent from the National Capital Region, 15 percent from 18 other cities and the remaining 17 percent from the rest of the country. The newer National Stock Exchange is even more exclusive, relying 87 percent on the top 20 cities for its funds.
Stock trading as an urban phenomenon is not unique to India. Fortunately, digital trading allows anyone in remote areas with a smartphone to connect to licensed trading platforms. It already accounts for 12 percent of transactions and is the hope of democratizing market access.
But democratizing capital gains is harder than democratizing access. Capital-intensive competitive “games” have a funnel effect where the biggest players profit disproportionately. Smart youngsters, with money to spare, know this. They are trying to build capital through the volatile cryptocurrency exchanges worth $750 million – a fringe game. Retail “crypto mining” requires spending of Rs.0.4 million. One computer – a tireless digital slave – can cover household expenses, in a throwback to the relaxed late 19th century, prior to the abolition of slavery.
Stock markets are just as amoral as shopping malls. They make affordable money available to carry out business plans, make companies accountable and disseminate corporate profits widely, though transparency needs to be increased and indiscretions better punished. The trick is to keep the regulations light in order to attract more companies to the stock exchanges. Mandatory spending of profits on corporate social responsibility is bad regulation, while taxing capital gains to fund the redistribution of income to the have-nots is good.
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