Opinion The price of paralysis

Remember: these government papers do not carry any tax incentive. Till last year,the ingrained response to the zero retail subscription to these papers was that in a market where avenues like the public provident fund offered a tax-plus-fixed income incentive,why would there be any demand for these papers? This has changed. Since there is no strong daily market for these papers,investors possibly plan to hold them to maturity.

So,even as institutional money from abroad is pouring quickly into the equity market,spurred by an economy that has logged an 8.8 per cent growth rate for this quarter following 8.6 per cent in the last quarter,retail investors now prefer bonds. And it is not as if the small investor is not interested in the stock market per se. The number of demat accounts has climbed to over 1 crore — 1.04 crore at last count,actually,and still climbing.

The reason they have just retired to the relative safety of fixed income cannot therefore,be market-induced weakness — but a combination of somewhat lethal policies,the latest among them being the lack of progress in the new pension scheme,and therefore,a lack of execution of projects by companies.

Before anyone makes a noise about rising inequality as a reason why the middle class has less money to invest,just check out the food inflation numbers. Forget the middle class,consumption is rising even for those lower down the income ladder. Even if one assumes static food production pulling up prices,higher demand can only come from more money with consumers. And the latest quarterly survey on unemployment from the labour ministry said jobs weren’t being lost — in fact 61,000 jobs were created.

So everything adds up: all sorts of company scrips,FMCG,infrastructure and banks,should attract retail investors. But they are not doing so.

Usually the retail investor,unlike the short-term institutional investor,explores a long-term growth story while investing. But these are exactly the stories that are in short supply,as a paranoid government moves in to shave off growth opportunities in several sectors.

And thus,investment avenues in the Indian stock market have dwindled so sharply for retail investors that one could be forgiven for believing this is an election year,when companies usually batten down the hatches till a new government is in power.

If these blunders do not get sorted out soon,the recovery of the stock markets from the global downturn will benefit only foreign institutional investors and high-net worth individuals — and very few retail investors.

Another classic example of a policy self-goal is land acquisition. In a recent chat,the managing director of Tata Steel,N.D. Nerurkar,said that no greenfield steel plant is likely to come up soon. Consequently,because of the politics of land acquisition,the level of steel imports has risen from 2 million tonnes per year to 7 million tonnes. The voracious Indian consumer of steel winds up creating profits for Chinese and European steel companies. The land acquisition bill is due in the next session of Parliament — but most of its substantive clauses are still up in the air.

Then there’s the delay in Parliament passing the amended Mines and Minerals Development and Regulation Act — a delay almost socialistic. This tardiness impacted the pricing of the divestment of the government’s stake in the state-owned mining behemoth NMDC — as well as that of the “ultra mega power projects” of the private sector equally well. Valuation reports by research firms for infrastructure companies have thus begun to look closely at how deeply their projects are tied to land acquisitions,and downgrading them accordingly. Infrastructure companies in India are supposed to be the vanguard of a long-term growth story; if this is what happens to their valuations,the stink is bound to be worse just about everywhere else.

To complicate the lack of demand-side factors,the government has begun to look askance at supply-side factors too. There are already enough restrictions on investment by insurance,banking and pension companies in the stockmarket. The kerfuffle on the new pension scheme brings this out in even sharper relief. The government is apparently not willing to wait for investors to make up their mind on whether they will take a long-term bet on making their pensions work through the stockmarkets. It is instead considering allowing state governments to open their budgets to provide a defined benefit-based pension to those who want it.

It has been a long,hard road to make fund managers take a leap into uncharted long-term waters,to build up an equity market-based corpus through contributions from investors. It was also expected that the funds in turn will be able to use this income stream to float more papers that could create an additional source of investment for retail investors.

And let’s not even get into a discussion of what’s being done to the mutual fund and insurance industry,where those retail investors shy of directly investing in stocks could get a bit of advice. No wonder the small fellows have cashed out.

The writer is Executive Editor (News),‘The Financial Express’

subhomoy.bhattacharjee@expressindia.com