In a
recent address at Grandes Conferences Catholiques, Brussels, Christine Lagarde,
Managing Director, IMF has discussed about what is called as “Small Boats” -
the livelihoods and economic aspirations of the poor and the
middle class.
It is
globally a known fact that the inequality between the rich and poor in every Nation
has been a problem of permanence which in fact,
to a great extend, has pulled down the potential economic growth of every country
on absolute terms.
While the global inequality has been
addressed to some extend and the gulf between the rich and poor countries are
falling down steadily over the centuries, the ability on the part of each
country to reduce the gap between the richest and poorest has always been on
deficit.
Emerging economies have responded well in
the recent decades in terms of rising average incomes of their people and they
have outperformed the developed world in on the rate of growth in income
levels.
The massive
global flows of products, services, people, knowledge, and ideas have been good
for global equality of income – and we need more
of that. So we can further reduce the gap between countries.
Wealth
Creation for poor is an irrelevant term as they only manage through to meet
their ends, throughout their life cycle. Countries, with strong demographics
and growing middleclass, like India, should have structural policies
encouraging higher savings in financial assets that can help in harnessing potential
economic growth and reducing economic inequality.
The sub- par
growth in India can be on account of excessive savings on physical assets which
directly does not contribute to the GDP. Savings through banking system is equally
substantial in India but it acts more as a measure of safety rather than creating
wealth.
Long term
Investments into capital market as a measure of wealth creation, is very low in
India, as the conservative culture embedded on Indian family system prevents
them to look beyond safety. Individual families rely upon gold and real estate
as key assets to create and transfer wealth to their successive generations.
The biggest
flaw with the State is their lack of ability to impress upon the population,
the power and velocity of the financial assets in generating growth, employment
and earnings which can lead to faster wealth creation and to reduce income inequality.
Interestingly,
the rich and ultra rich who are supposed to be the ones investing in Capital
markets, also have limited exposure to stock markets and mutual funds.
|
LONG ROAD TO WEALTH
CREATION
|
|||||
|
YEAR
|
GDP (Cr)
|
FIN SAVINGS
(Cr) |
Equity
savings(Cr) |
Fin Savings
To GDP(%) |
Equities To
Fin savings(%) |
|
2006-07
|
42.9L
|
7.6L
|
50,600
|
17.7
|
6.7
|
|
2007-08
|
49.9L
|
7.6L
|
74,000
|
15.2
|
9.8
|
|
2008-09
|
56.3L
|
7.2L
|
-5,100
|
12.8
|
-0.7
|
|
2009-10
|
64.8L
|
9.9L
|
44,800
|
15.3
|
4.5
|
|
2010-11
|
77.8L
|
10.7L
|
1,700
|
13.8
|
0.2
|
|
2011-12
|
90.1L
|
9.2L
|
-2,800
|
10.2
|
-0.3
|
|
2012-13
|
101.1L
|
10.2L
|
43,800
|
10.1
|
4.3
|
|
2013-14
|
113.6L
|
11.3L
|
27,400
|
10.4
|
2.4
|
|
2014-15
|
126.6L
|
13.4L
|
39,300
|
10.6
|
2.9
|
|
2015-16
|
140.5L
|
15.2L
|
52,200
|
10.9
|
3.4
|
While the equities
as a % of financial savings are very low in India, which is a concern, the
larger issue is the lack of broad base. Even a small part of their savings,
from middle class families, routed through equities as long term Investments,
can make a substantial difference to the economic growth as well as the family’s
wealth creation.
Private
sector should also play a vital role in bring the awareness on the power of velocity
which the financial assets can generate and enable the emerging middle class to
make a part of their savings coming through capital market. This will make a
massive transformation for the nation in terms of incremental growth and can
really help the small boats to rise along with the yachts, in creating wealth
over the long term.
Latest data
from NSSO show that the share of total value of assets in equities in rural
India is 0.07% and that of urban India is just 0.17%. The share of Bank Savings
in the total value of assets in rural India is 1.65% and that in urban India is
4.35%. It is still dominantly skewed towards the physical assets.
While the
Government and Private sector has the responsibility of investing into
Innovations, Infrastructure, Education and Employment generation, the People of
the country also have equal responsibility in terms of generating more savings into
financial assets which can flow into the economic system.
India has
the most favored demography, which will be the driving factor for growth and can
generate more capital required for growth internally if People can make a
decent shift in their savings from Physical assets to Financial Assets.
People
should come forward to trade a bit on the risk, to generate wealth. Indian
Equities have generated a CAGR of 12% in the last 3 decades and many Mutual
Fund Assets have delivered as high as 17% CAGR in the last 20 years.
Over 500
million of Indian Population is in the earning cycle and this will move towards
650 million by 2030. If every Individual earning population of India starts
saving 2-3% incrementally on financial assets and especially into capital
markets, the impact on growth can be substantial.
As Madam, Christine Lagarde says, we need to
lift the “small boats” to generate stronger and more durable growth. If we lift the income
share of the poor and middle class by1 percentage point, then GDP growth increases by as much as 0.38 percentage points
in a country over five years.
Expecting an
Inclusive growth is not enough… to achieve the same…Inclusive efforts too are
required and People of the Country do should contribute, by saving more into
productive assets.
T Margabandhu
