Sanjeev Ahluwalia | The morality of stock markets

Indian stock markets look like “mushroom rocks”, top-heavy and delicately balanced, just waiting to be tipped over by bad news, of which there is plenty. Investors, whose stocks are part of the ongoing bull-run starting February 2021, could not care less having gained Rs.11 trillion, since May 24.

This bonanza of wealth accretion, for the less than 15 per cent of households who own stocks, contrasts with increasing penury for most others from the economic and health depredations of the second wave of Covid-19 and its mutants.

It is hypocritical, however, to wring our hands in anguish because a few have become richer whilst the majority, particularly those in the bottom three quintiles are struggling. Gunnar Myrdal “hash tagged” India as a “dual economy” in 1968, in his seminal work Asian Drama. 

Admittedly, much has changed since then. The urban, modern part of the economy has expanded significantly but so has inequity. Rapid wealth accretion at the pinnacle — an outcome of the 1992 liberalisation which unleashed entrepreneurship and economic growth — remains unmatched by enhanced living standards for the middle class, though, till the pandemic struck, poverty in the bottom two quintile had reduced significantly. 

The stock market is not a useful proxy for economic welfare. It tracks the well-being of an elitist minority in the formal sector, albeit with trickle down benefits. But it is a real-time, high visibility metric of government's performance in partially liberalised economies like India, where government continues to be an intrusive economic agent via state owned companies and financial institutions, administered pricing and capital allocation regimes.

India’s exchange rate regulator — the Reserve Bank of India (RBI) — strives to keep the exchange rate stable, except for adjustments reflecting the difference across currencies in the rate of inflation, which, RBI is mandated to keep within a float of two percentage points below or above the norm of four per cent per year. Presently we are scraping the underside of the upper bound.

Sound inflation management and economic growth attracts foreign investors, who have invested Rs.25 trillion in India or 13 per cent of the market capitalisation. These funds are important. They help us plug the foreign exchange gap because we chronically export less than we import.

The eco-system within which stocks are traded and fortunes won or lost, is regulated by the Securities Exchange Board of India (SEBI) since April 1992. On the demand side are 41 million registered investors — individuals and entities — of which 9,823 are foreign portfolio investors and 45,000 domestic companies. On the supply side 5,600 companies supply the bonds and equity traded publicly through 1,343 stockbrokers. Over 400 portfolio management entities and mutual funds, intermediate the flows.

The market capitalisation of Rs.212 trillion was 107 per cent of the GDP in 2019-20 at current prices and around 2.4 per cent of the global market capitalisation (SEBI 2019-20).

The Bombay Stock Exchange was the first. It has operated from 1875. Since then, 20 other exchanges were established but have shut shop voluntarily or like the Calcutta Stock Exchange are under litigation to do so. Back then primary goods like opium, indigo and cotton were traded.

Today, Bombay is Mumbai, and the renamed BSE, no longer deals with commodities, for which there are specialised exchanges. 84 per cent of the capital raised in 2019-20, was by telecom, finance and electronics related firms. In 1992 the National Stock Exchange (NSE) became a competitor exchange for domestic trading.

Stock markets however remains a fairly “clubby” business. Of the Rs.0.8 trillion of equity raised in 2019-20, just 12 companies accounted for 95.7 per cent while 64 others accounted for the residual 4.3 per cent.

Consider also, the constricted geographic spread from where the funds are sourced. BSE raises 51 per cent of funds from Mumbai, 17 per cent from the National Capital Region, 15 per cent from 18 other cities and the residual 17 per cent from the rest of the country. The newer National Stock Exchange is even more exclusive, relying on the twenty largest cities for 87 per cent for the funds.

Stock trading as an urban phenomenon is not unique to India. Happily, digital trading, allows anyone in remote areas with a smart phone, to link into licensed trading platforms. It already accounts for 12 per cent of the transactions and is the hope for democratising market access.

But democratising capital gains is tougher than democratising access. Capital intensive competitive “games” have a funneling effect where the biggest players benefit disproportionately. Savvy youngsters, with cash to spare, know this. They try and build capital through the volatile cryptocurrency exchanges worth $750 million — an extra-legal play. Retail “crypto mining” requires spending Rs.0.4 million. One computer — a tireless digital slave — can meet household expenses, in a throwback to the leisurely late 19th century, prior to slavery abolition.

Stock markets are as amoral as shopping malls. They make affordable money available for implementing business plans, make companies accountable and spread business gains widely, though transparency should be enhanced, and indiscretions sanctioned better. The trick is to keep regulation light-handed to attract more companies to the exchanges. The compulsory spend from profits on corporate social responsibility is bad regulation whilst taxing capital gains, to fund income redistribution to the have-nots, is good.