A year ago, S. Kashinath, an illiterate laborer from India’s southern
Tamil Nadu State, lost 300,000 rupees (US$5,600) in savings he invested
in a pyramid scheme promising high returns from emu farming.
Now,
Kashinath, and about 23 million other low to middle-income Indians are
being courted by a government scheme to boost investment in local stock
markets.
However, Kashinath thinks the plan has as much chance of flying as the birds he bought into.
“I
can’t even read or write. How do you expect me to buy stocks that I
don’t understand? My money is stuck, but once I get it back, I’ll open a
bank account to keep it safe,” he told reporters by telephone.
The recently introduced Rajiv Gandhi Equity Savings Scheme — named after
the popular former Indian prime minister who was assassinated in 1991 —
offers Indian investors earning less than 1 million rupees (US$18,600) a
year a 50 percent tax break on stock investments of up to 50,000
rupees.
At more than 30 percent, India has one of the world’s highest savings
rates — more than double the US — and the bulk of the nation’s US$800
billion in savings is parked in gold. India is the world’s biggest gold
buyer and holds US$1 trillion of the precious metal, World Gold Council
data shows — more than the combined military spending by the US, China,
Russia and Britain.
The ambitious scheme, which aims to broaden share ownership, re-energise
an unprofitable mutual fund industry and bring structure to a patchy
investment landscape, faces formidable barriers — not least India’s love
affair with gold.
“Gold holds an emotional charm for most Indians. Those are some big
shoes to fill for any sort of investment,” said V. Ramesh, deputy CEO of
the Association of Mutual Funds in India. Indians also save cash, in bank savings or certificates of deposit, and increasingly invest in property.
The investment scheme is the brainchild of Thomas Mathew, a former
finance ministry official, who reckons more than 23 million Indians
could be eligible targets. If they all invest the maximum amount, there
could be a potential inflow of 116 trillion rupees. Yet fund
managers say it will be costly and difficult to tap into these millions
of small, and often skeptical, investors, many of whom live in rural
areas and do not trust big city stock markets.
The investment scheme is the brainchild of Thomas Mathew, a former
finance ministry official, who reckons more than 23 million Indians
could be eligible targets. If they all invest the maximum amount, there
could be a potential inflow of 116 trillion rupees.
Yet fund
managers say it will be costly and difficult to tap into these millions
of small, and often skeptical, investors, many of whom live in rural
areas and do not trust big city stock markets.
While the scheme could help reduce gold imports and the damage that
causes to India’s current account deficit, the government also hopes to
reduce market dependence on volatile foreign flows. India first allowed
foreign investors to buy local shares in 1992 and they now hold nearly
one-fifth of the total, Morgan Stanley data show.
India’s stock markets are notoriously volatile. The benchmark BSE index
has risen or fallen by a double digit percentage rate in 18 of the past
20 years — it is up by more than one-fifth so far this year. That
instability has driven out many retail investors. Outflows from equity
mutual funds in India reached a two-year high in September as investors
cashed out of a stock rally.
