The result of India's changes is impressive in a wider context. Finance's breadth and depth have increased dramatically— whether in finance, financial markets, securities, or fund management. Through emerging asset classes, expanding consumer networks and creative delivery, investment opportunities have evolved.
If that's the perception of the whole, it may not seem amazing what's going on in the individual components. Under the brightness and glamour of economies, important issues are often camouflaged. Distortions that infiltrate the financial structure may pose a risk of turning it away from the very reason in which it has been revamped.
Let's start with banking bias. Rural areas accounted for 15% of deposits and 24% of credit in 1990, both falling to 10% in 2018. Metro areas sucked in a vast part of the business— with deposits jumping from 39% to 51% and bank loans jumping from 37% to 59%. Some mild changes have occurred in semi-urban / urban areas.
Despite interventions such as Jan Dhan Yojana, the decline in rural banking may slow the pace of development and achievement of the UN's Sustainable Development Objectives. Overlooking rural and semi-urban areas, which are traditional venues for raising low-cost deposits, would not do much good for public sector banks. On the market side, too, the scene is uncomfortable. For a benchmark index that accounts for about 70 per cent of the domestic market cap, about half of the companies listed on stock markets are exchanged on any day; volatility accumulation is deemed normal only in a few shares, in the absence of independent research to promote new enterprises that carry promise.
Three sectors— banking, finance, and insurance — mobilized up to 60% of primary-market resources anywhere in 2010-18, leaving questions as to how' Make in India ' will be made possible because production hardly has a good share. Regional inequities are becoming glaring as 80% of resources are mobilized in the western and northern regions— the south and the east are far behind with 14% and 6% respectively.
Reforms are expected to increase the public market base for owners. India's public markets have not sufficiently expanded its investor base to the potential it holds, as can be seen from resources mobilized on the private placement corporate debt market (seven times higher), and Qualified Institutional Placements accounted for about 50% of primary issuance in 2010-18.
This is definitely a difference for Indian stocks, but the underlying issue is about its doubtful contribution to either economy or growth, where the notional value exchanged in stock derivatives (mostly index options) is 30 times the size of spot market turnover, gaining mainly from a small fraction of smart traders specialized in the zero-sum game
Although China Development Bank likes $2 trillion in assets; Brazil's BNDES, $272 billion; and Russia's recently formed VEB.RF, $50 billion; play a pivotal role in supplying development financing to their respective markets, India has missed this significant potential by neglecting and transforming a few great development banks into commercial banks that are now under pressure. Until their transition, DFIs in India made two-thirds of overall corporate finance disbursements.
Tags : wider context, individual components, Rural areas, domestic market cap, Indian stocks,