My year end musings. A Financial Sector Model for India’s dream: 9% annual growth, $30 trillion GDP by 2047. India is transforming from a nation of savers to investors. The tussle between the saver/ borrower and issuer/ investor model is underway. In the early 80s, the Indian saver had low confidence in financial assets versus gold and land. Slowly the saver moved some part to bank deposits, UTI and LIC. Even in the 90s, investing in equities was considered “speculative”. Hence companies looking for capital went to the foreign institutional investor (FII). FIIs saw potential and bought into companies while the Indian saver stayed away. Companies raised capital through the less known Luxembourg stock exchange. India’s capital market was being exported. Some of us highlighted this phenomenon to SEBI. That began the private placement market (QIP) in early 2000s. Hence FIIs could also buy on Indian markets. The Indian saver’s interest in markets improved after the global financial crisis. That saver is now savouring the joys of investing. Mutual fund platforms, cash equities and derivatives markets, insurance funds, global private equity in India, other platforms like AIFs, lower tax regime for equity, have all converted a saver to an investor. How do we create a sustained growth story hereon? 1.Many investors have joined post Covid. They have mainly seen upside. While the situation is not comparable at present, we need to keep Japan of the 80s at the back of our mind. Its Nikkei Index peak was 1989. 34 years later with near zero interest rates, the Nikkei is still below its 1989 peak. We must avoid bubbles through policy, regulation, education, and supply of quality paper. Companies should raise equity at lower cost of capital for productive use. 2.While we must avoid tax arbitrage in debt, unless debt markets grow it will be a one legged race. The current gap on highest marginal tax rate between debt and equity of 39% and 10% is perhaps too wide. 3.Double taxation on dividends needs relook. A shareholder is like a partner. There is no additional tax when money is moved from the partnership to the partners capital account. Same principle applies to shareholders. 4. Low cost leverage through derivatives can distort financial markets. This needs attention. 5.As savers become investors the banking sector faces challenges on its deposits and cost of funds. The large corporate sector has to meaningfully move to capital markets (debt and equity) and away from banks. Banks will become distributors of corporate debt rather than storage houses. They will need to penetrate mid sized corporates, MSMEs and consumers. 6. We should avoid a retrospective tax and regulatory regime. We will need to balance developmental and regulatory role. 7. Two areas which need urgent focus for India’s aspiration are acquisition financing and streamlining of the IBC/ NCLT process. As India aspires, the financial sector will be the key engine for delivery. Impact of technology is a separate subject of discussion for a future date. The saver/ borrower and the issuer/ investor models will coexist. It is time for a wholistic financial sector view.
@udaykotak Point number 1 - If we can find a way to train housewives on direct small investments in stocks- our economy may grow at a much faster pace.
@udaykotak That is good Sir. Ab to please bata dijiye 👇 Why did you sell the shares in Yes Bank immediately after the allotment in year 2020 ? #YesBank #UdayKotak #Nifty #Sensex
Great points and I would love to see a $30 trillion GDP by 2047! I am super bullish on the India story even though see some macro risks 1. Per capita GNI has grown by 8.6% from 2016-17 to 2022-23, this was significantly better from 2000-2012, the slope of earnings growth tapered significantly after that, earnings growth is important for household savings growth to be ploughed into financial markets. 2. Youth unemployment rate is continuously and secularly creeping up and is at around 24%, 1 out 4 youth struggling to find employment is a structural challenge and this will again impact earnings and savings growth long term. 3. As consumption patterns change and earnings growth tapers - household savings rate is declining and currently at a multi decadal low while financialization of savings is playing out well in our favour at some point less savings will start to hurt the financial markets depth and breadth, also the market needs to broaden beyond primarily Tier 1 and 1.5 and financial literacy will be super important too. In spite of the above points I am still very hopeful that as India’s youth finds more avenues to sustain themselves and moves from becoming a job seeker to a creator and as the overall education levels improve in the country and hopefully per capita GNI continues to grow well we will be able to mitigate these risks and become a developed economy by 2047.
@udaykotak 2nd point is grossly wrong.. equity investors pay STT
@udaykotak What about worst services @ Kotak. No business ethics, morals. No commitment value. No one at senior management level ready to listen since last 3 months. All is going to deaf ears. You are last hope left else RBI.
@udaykotak 1 & 4 are unnecessary. 1 if happening will be global phenomenon and can’t be avoided. 4 is part of normal financial market function so no point going and fix something that isn’t broken. Rest are great points which people designing policy must focus on.
@udaykotak uday sir simple imps txns is not happening no response by customer sevice
Great Post Uday Sir. We also need to curb in the “tech scam rate” which is currently at 20k + Indians everyday. This is no longer ok by any yardstick. The simple method to avoid this is probably nip it in the bud by doing the following 1. The tools that are main for such scams are A) A Bank A/c B) SIM Card Layer 1 - What if banks don’t allow opening of A/c’s without verified SIM USAGE FOR 6 months report from Telecom Companies as most of the SIM used for such purpose are use and throw and never used for 6 odd Months. Layer 2 - if we can depute physical verification post A/c opening to confirm / close such A/c’s. Layer 3 - What if government only allows banks to sell SIM Cards and no other entities to sell SIM Cards. Layer 4 - What if we have a rule of a PIN being sent to the Residence Address and they have to verify it over an APP / phone, the criminal open A/c off poor people who are not aware that this is happening on their A/c’s. Basically block the whole system The whole nexus according to me will be broken bare. Watch this documentary by NDTV NUH TO NEW YORK - INDIA’s OTP SCAM youtu.be/tpdKr4Jo0vc?si…
One of the major impediments for growth is the exorbitant cost of real estate across India and more so in Metros and Tier 2 cities. The high cost of land does not allow for meaningful size of creation of public spaces or setting up of industries/retail at scale. Government needs to find ways and means to create satellite cities that can promote big ticket investments in building infrastructure.