The Indian financial sector has matured since the reforms, but it seems to be short of mojo. The kind of focus and thrust given to evolving regulation and supervision is perhaps not seen in devising a strategy that could harness the power and potential of finance to ensure continued strength and sustainability of the real economy.
First a look at certain false premises.
The clamour for universal banking that was the flavour in the mid-1990s enabled some development banks to turn into wholesale banks. The outcome, however, proved to be perilous to the growth of long-term finance in India with public sector banks overburdened with financing the whole economy; many turned sick. Whether the development banks that converted into commercial banks achieved their purpose is a big question mark, going by the experience of IDBI.
A stock market that was expected to fill the gap left by long-term financial institutions is nowhere near meeting the new capital issuance India needs. Stock markets in India, as is the perception in many developing countries, is all about a couple of benchmark indices celebrating every new high they scale rather than the depths of new capital raised and more investors added.
Narrow banking was another fad in the late 1990s that limited the potential of problem banks to overcome the constraints of bad debts by making new loans of good quality. While China made problem banks grow to the extent of getting listed in international bourses by capital support and other measures, in India their strength was further eroded by narrow banking. The corporate debt market has barely taken off in India to its potential.
The largest IPO that India hadwas that of Coal India (about $3 billion). Total new capital issuance in 2016, considered one of the best in recent years, totalled $3.8 billion in which a large part of the proceeds went to provide an exit to current investors as fresh capital infused in companies was only 30 per cent. China reached a level of 24 per cent of the global equity capital markets issuance, the highest ever since the records began in 1980, with numerous instruments and some of the world’s biggest IPOs.
The SME capital market, a long-felt need too is of low key. True, the BSE’s SME segment is closer to 200 listings, but its market capitalisation is just 0.09 per cent of the total market capitalisation as compared to 20 per cent in respect of Chinext and 12 per cent in regard to Kosdaq and 9 per cent in Nigeria. According to an industry study, from inception till 2014, total issuance in BSE SME amounted to $126 million with an average issue size of $1.2 million compared to $15 billion raised in Kosdaq with an average issue size of $16 million and $59 billion raised in Chinext with an average issue size of $87 million.
Public capital markets
In India public capital markets are of paramount importance; they could provide greater opportunities for individuals to invest in debt market products. The experience, however, shows something different. Of the total debt raised in 2016, most of it was through private placement that does not touch the retail investors. Of the ₹5 lakh crore raised in Indian markets in 2016 (about 70 per cent by the Government) only ₹0.2 lakh crore was raised in the public markets
India has the largest company listings for any stock exchange in the world but half of the scrips rarely get traded at all. BSE with 5821 listed companies reported a market cap of $1.6 trillion in 2016 and a trading value of $108 billion with NSE adding another $692 billion for the whole year making annual trading value of Indian stock exchanges at about $800 billion. In comparison, Korea with $1.2 trillion market cap (2059 companies) does $1.6 trillion trading value, Shanghai with a $4-trillion market cap (1182 listed companies) makes $7.5 trillion, and Shenzhen with 1870 listings $11 trillion value traded.
However, when it comes trading in speculative products India’s record is vastly different. According to SEBI statistics, the turnover in the cash market segment in the last five years (2011-16) in India grew at 18 per cent from ₹35,77,410 crore in 2010-11 to ₹42,36,983 crore in 2015-16, whereas the notional value of turnover of equity derivatives more than doubled from ₹2,92,48,221 crore in 2010-11 to ₹6,48,25,834 crore, a rather disproportionate growth that prompted the regulator to look deeper into this aspect.
The situation in other asset class segments too is not that inspiring. Even after more than a decade of commodities derivatives trading in India, the market is confined only to one single product — futures — with options introduced only recently, leave alone other products. Traded value in commodities and currency derivatives vastly reduced after the exit of the original promoters of MCX and MCX Stock Exchange respectively (from ₹1,55,97,095 crore in 2011-12 to ₹35,64,047crore in MCX, and from ₹37,32,446 crore in 2011-12 to ₹3,24,576 crore in 2015-16 in MCX-SX, now renamed MSEI). Indian currency is prone to the gyrations in Non-Deliverable Forward Market based out of Singapore when INR/USD comes under pressure. Whereas the price discovery for stocks in India’s most traded index happens at Singapore, which opens 90 minutes before India’s markets (SGX Nifty), mirror-like products of futures trade can happen in Dubai even long after the markets in India are closed making it more attractive to play for foreign players.
No strategy map
A major problem with Indian finance is it never had a long-term road map or strategic plan regarding what the country would like to pursue and achieve with financial market development. Recent evidence shows that just having deeper markets is not enough unless these are connected in a meaningful way with the economy, jobs and incomes. Regulation no doubt vastly improved in quality and quantity, but there is no blueprint on all that it should serve and where it should reach.
A disparate and disconnected market structure with every segment seeking value maximisation for itself without concern for the public good could lead to numerous contradictions, which is what is showing up in India. A stock index at a historic high with barely significant capital issuance, a high growth economy with low access to finance for a large number of people, intense market activity but volatility that keeps away retail investors — these are the types of aberrations, if left unattended, that could cause distortions which could prove detrimental to market stability. No doubt regulation in India has caught up with best in the world, but more often it seems like a medicine that is strong enough to cure a disease but not good enough to restore good health.
The writer was the chief economist of the Indian Banks’ Association. The views are personal