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The bigger bomb

T N Ninan

The total value of all the several thousand stocks listed on Indian stock markets is down to Rs 400,000 crore (Rs 4,000 billion).

About 20 per cent of that is held by the foreign institutional investors, and it should be a safe guess that another 30 per cent or so is held by the promoters of these companies (including the government, because some of the largest listed companies are in the public sector).

That leaves about Rs 200,000 crore (Rs 2,000 billion) in the hands of India's investing public. You can't really call it the middle class, because that's a much larger category of some 20 crore (200 million) people, whereas investors in stocks and shares are less than 10 per cent of that number.

Indeed, if you knock out double-counting of different members of a family, the investing population is down to about 70 lakh (7 million). That gives us an average investment portfolio of Rs 300,000.

To me, this is not evidence of any great stock market culture (or cult, as the preferred word used to be). If anything, the middle class Indian seems to be deeply suspicious of the stock market, given the overwhelming preference that he demonstrates for safety and for steady returns.

Thus, the time deposits with banks total Rs 11 lakh crore (11 trillion), and long-term savings in provident funds and the like account for another Rs 90,000 crore (Rs 900 billion). In other words, the average household invests only about 15 per cent of its surplus cash in stocks. If you include housing investment in the calculus, the share of stocks will come down even further, perhaps to barely 5 per cent of the total.

The first question is whether this extreme wariness of the stock market is justified. Most people would say, yes. After all, there have been no fewer than three bull runs in the last decade, none of which had lasting effect and two of which were subsequently exposed as major scams.

The average investor burnt his fingers badly in each of these boom-bust cycles; so wariness is to be expected. Or, consider the experience of the professionals who take the decisions in the foreign investing institutions.

At last count, some $15 billion has come in during the past decade as FII money, and the current value of that investment is down by more than half. So the professionals have done no better than the amateurs.

Does this have to do with just the scams, or is there a larger problem with the quality of companies listed on the market? Clearly, it is the latter.

Among the 22 Indian companies that have a market capitalisation of over a billion dollars, there are just two manufacturing firms (as different from FMCG, pharmaceutical, software and financial firms), and one of them is in the public sector. Clearly, the lack of health in India's manufacturing sector is one important problem.

Another is the fact that a great many firms that would command good value on the markets are privately held, including the likes of General Electric (now almost as big as Hindustan Lever in India) and Maruti Udyog, and others like Coca-Cola, Samsung and LG.

If there were more companies with strong businesses that got listed on the markets, more money would flow into shares.

But if Jaswant Singh is worrying about how to revive the market, I would suggest to him that he should be focusing on other things. Because, important as the stock market is and despite the evidence that there is a lack of market confidence, these problems are minuscule when compared with what is coming to the surface with regard to the infinitely bigger basket of 'safe money'.

That is, the money lying in the banks and with the pension and provident funds. Most of that money is invested in government or 'approved' securities - like the paper issued by discredited firms like IDBI and IFCI.

Government paper is no better, since Crisil has downgraded even Maharashtra to junk bond status, and since many state governments are defaulting on their guarantees and other commitments - without even hitting the headlines. This is a much, much bigger time bomb than any problem in the stock market. And it is ticking away.

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