Economic Survey 2023-24 Highlights Retail Investor Surge and Need for Caution

On July 22, 2024, Union Finance Minister Nirmala Sitharaman presented the Economic Survey for the year 2023-24 in both houses of Parliament. This comprehensive report sheds light on the state of the Indian economy, acknowledging that while the situation has improved, there are potential vulnerabilities ahead that must be addressed.

The Economic Survey describes the current moment as a ‘turnpike moment’ for the Indian financial sector, signifying a shift in dynamics. It suggests that the historical dominance of banking in providing credit is decreasing, giving way to a new era where capital markets are expected to play a greater role in financing.

Looking ahead, Sitharaman will unveil the Union Budget for the 2024-25 fiscal year in the Lok Sabha on July 23, marking this as the first budget presented by the Modi Government since the last general elections.

The Economic Survey serves as an annual report card on government finances and broader economic performance for the fiscal year ending March 31, while also forecasting future policy directions. This year’s document is optimistic, indicating that the economic challenges triggered by the pandemic are largely behind us, with a brighter outlook on the horizon compared to pre-COVID times.

Among the notable findings is the pronounced increase in retail investors participating in the stock market. The report emphasizes the surge in market capitalisation of the Indian equity market, which now holds the distinction of ranking fifth globally in terms of the market capitalisation-to-GDP ratio. However, the document also stresses the importance of remaining vigilant due to the high levels of retail participation.

The Economic Survey expresses concern over the growing trend of speculative trading, particularly in derivatives. It points out that while trading in derivatives can lead to significant gains, it can also encourage gambling tendencies among investors, often resulting in losses. The report indicates that many global investors in derivatives trading tend to face monetary setbacks over time.

To counteract the negative outcomes associated with derivatives trading, the document emphasizes the necessity of enhancing investor education and awareness. Raising understanding about the risks and potential for low or negative returns on such trades is essential for protecting retail investors.

In light of potential stock market corrections, the survey cautions that retail investors, particularly those engaged in derivatives, may suffer substantial losses. Such experiences could lead to a feeling of betrayal among these individuals, potentially deterring them from participating in capital markets in the future. This, in turn, could have detrimental effects on both their financial well-being and the broader economy.

The report highlights that individual investors’ share of equity cash market turnover was at 35.9% in FY24. Concurrently, the number of demat accounts has risen sharply, from 114.5 million in FY23 to 151.4 million in FY24. This uptick in engagement illustrates the increasing involvement of individual investors in capital markets.

Significantly, the number of registered investors at the National Stock Exchange (NSE) has nearly tripled since March 2020, reaching approximately 92 million by the end of March 2024, indicating that around 20% of Indian households are now investing their savings in financial markets.

The Economic Survey notes that retail participation has expanded particularly through mutual funds. Fiscal year 2024 was characterized by a robust increase in mutual funds, with assets under management growing by ₹14 trillion or 35% year-on-year, culminating in a total of ₹53.4 trillion by the end of FY24. Furthermore, the number of mutual fund accounts, or folios, escalated from 146 million in FY23 to 178 million by the end of FY24.

The report acknowledges that India‘s rise as the fifth-largest economy is reflected in the growing financial literacy and engagement among individual investors. As a result, institutions within banking, insurance, and capital markets are urged to prioritize consumer interests by enhancing service quality through transparency and fair practices.

Moreover, the Economic Survey recommends that these financial entities align their internal assessment and incentive systems with customer-centric goals. This alignment is crucial not only for their long-term success but also for the benefit of the wider economy.

In a developing nation like India, the financial sector is called upon to complement the banking sector and satisfy the capital needs for economic growth. The growth of the financial sector must align with overall economic advancement, taking care to avoid over-financialisation at this stage of development.

There are speculations regarding potential adjustments in the long-term capital gains tax or a standardisation of holding periods for various assets in the upcoming Union Budget, as discussed by Finance Minister Nirmala Sitharaman at a recent event hosted by the Bombay Stock Exchange. Reports have emerged suggesting that income derived from futures and options trading could be classified as ‘speculative’ instead of ‘business income’, necessitating further scrutiny of retail investor engagement in these markets.