Indian Capital Markets: Entering into its Amrut Kaal
CA. Navneet Munot
Member of the Institute | Reachable at: eboard@icai.in
“Over the last couple of decades, the term ‘demographic dividend’ has been synonymous with 2 countries viz. India and China. Demographic dividend refers to the economic growth potential that can result from working age population of a country exceeding its non-working age population. While in China, the trend seems to be reversing recently, India still remains well poised to reap the demographic dividends of its young population, with more than 60% of population below the age of 35 years.”
Historic Parallels: The US in the 1980s and India Today
In light of this, some interesting parallels can be drawn between the recent developments in India and those witnessed in US in 1980s. In the 1980s, due to the Baby Boomer effect, the U.S. reaped the demographic dividend of a comparatively young population. During the period runaway inflation was reined in by Paul Volcker’s decisive actions. Speaking of economy, one cannot look back in U.S. history without a mention of Reagan’s famous words, “Government has no business to be in business.” Reduction of government spending, lowering of tax rates, deregulation, and reduced government intrusion in business were the pillars of economic policy during that period. All of this led to the U.S. enjoying a prolonged period of NICE (non-inflationary continuous expansion).
About the same time, the extensive rollout of 401(k)s transformed the way Americans saved for retirement. This also ensured a huge source of patient capital promoting massive innovation and growth in private equity, venture capital, high yielding bonds, securitization, muni bonds, REITs, etc.
India, too, may be on the cusp of a similar era. India has been maintaining constant focus on structural reforms. The privatisation of India’s national carrier Air India was a historic moment. RBI on its part, has used a potent combination of traditional and progressive measures to support growth, without losing sight of inflation control. On the demographic front, India would like to emulate the U.S. of the 80s to reap demographic dividends of its young populace. Focus on developing the social security net makes India’s growth more inclusive.
Further, just like 401(k) fueled a culture of long-term investment amongst Americans; in the Indian context, growing acceptability of SIPs (Systematic Investment Plans), which allow individuals to invest fixed amounts at regular intervals in Mutual Funds, has brought a disciplined long-term approach to investing to the fore.
Macro Comparison: U.S. Economic Surge (1980s) vs. India’s Amrut Kaal (2020s)
| Economic Pillar | United States (1980s) | India Today (Amrut Kaal) |
|---|---|---|
| Demographics | Baby Boomers entering productive workforce | >60% of population under 35 years of age |
| Monetary Stance | Paul Volcker tamed runaway inflation | RBI balanced growth support with inflation anchoring |
| Structural Reforms | Reaganomics: Deregulation, tax cuts, spending curbs | Privatisation (Air India), FDI easing, formalisation |
| Institutional Savings | 401(k) retirement rollout providing patient capital | SIP revolution in Mutual Funds driving monthly inflows |
| Capital Market Outcome | Prolonged NICE era; boom in PE, VC, REITs | 7th most valued stock market globally; domestic resilience |
The Hour of Reckoning: Evolution & SEBI’s Foundation
Goes without saying that one of the key ingredients to reap rich demographic dividend happens to be efficient allocation of capital / robustness of a country’s capital markets. Over the years, Capital markets in India have certainly come across a long journey. With the 7th most valued stock market in the world, Indian capital markets have traversed quite a journey.
While the history of Indian capital market is quite long, its proverbial ‘hour of reckoning’ happened in the 1990s, when the focus shifted to its development and regulation. Liberalisation and the goal of giving markets a greater role in capital allocation triggered a series of reforms in the Indian securities market. However, the biggest of them was the emergence of a strong regulator in the form of SEBI (formed in 1988 but accorded statutory powers only in 1992). SEBI has played a critical role in protecting the interest of investors over the years.
Financial Inclusion: The Powerful JAM Trinity
While the 90s broadened the horizon of India’s economy, 2014 ushered in a new era of financial inclusion. The Government initiated the Pradhan Mantri Jan Dhan Yojana in August 2014 on the guiding principle of:
The powerful trinity of Jan Dhan Yojana, Aadhaar, and Mobile number (JAM) has truly ushered in an era of deep, irreversible financial inclusion in India.
Financialization of Savings: Demat & SIP Revolution
Not only have more Indians started entering mainstream finance, but over the past few years, Indians have also started investing more. Direct participation in equities and mutual funds has reached historic highs:
SIP contribution has increased exponentially from Rs 43,921 Crore in FY17 to Rs 1,24,566 Crore in FY22; and has already crossed ~Rs 1,40,000 Crore in FY23 (till Feb’23).
Over the years, with varied product offerings catering to different financial needs, Indian Mutual Funds have given investors a viable avenue to channelize their savings effectively. The ‘Mutual Funds Sahi Hai’ campaign run by AMFI, along with tireless efforts of distributors, has played a key role in making Mutual Funds a preferred choice of investment for investors.
🏙️ GIFT City: India’s Global Financial Gateway
India’s endeavour to come out as a global financial hub too received a push with setting up of International Financial Service Centre (IFSC) in the form of Gujarat International Finance Tec-City (GIFT City). IFSC is already gaining popularity amongst AIFs (Alternative Investment Funds) as it provides world-class infrastructure, tax efficient structure and convenient access to multiple markets.
⚖️ Domestic Counterbalance to FPI Outflows
Increasing financialization of savings bodes well for the depth of capital markets. Flows from domestic investors have robustly counterbalanced significant outflows from Foreign Portfolio Investors (FPIs). That said, India has been a preferred destination for FPIs over the years, with net flows (Equity + Debt) being positive in 24 out of the last 30 fiscal years. This structural trend is expected to continue.
Amrut Kaal (2022–2047): An Oasis of Global Hope
Looking forward, as India marches on in its Amrut Kaal (2022-2047), it continues to remain an oasis of hope for the global economy, owing to a large domestic market, democracy, demographic advantage, skilled labour force, push for digitization, impetus to manufacturing, and the global China+1 diversification strategy.
India’s fundamentals have largely been resilient even in the midst of global recessionary trends. India is not only steadfast in its focus on growth but is also committed to sustainable and inclusive development. Further, the focus on growth hasn’t distracted the policy makers from the overarching goal of ensuring dignified living for the masses. This focus on robust, sustainable, inclusive growth along with an emphasis on physical and social infrastructure can certainly help India tick the right boxes in its Amrut Kaal.
The Four Powerful Engines Propelling India Forward
Stable governance, rule of law, and institutional strength
>60% under 35 years fueling productivity and innovation
Vast domestic consumption market and rising aspirational middle class
Digital public infrastructure, JAM, fintech, and UPI scale
Conclusion: The Pivotal Role of Chartered Accountants
While global cues are likely to keep volatility at heightened levels; with powerful forces of Democracy, Demographics, Demand and Digitisation on its side, India’s economy and its capital market are well poised to go from strength to strength and Chartered Accountants will play a pivotal role in this journey.