If an economy is a train, stock market is the engine. With rising population, India needs to create enough work for its people. It is not the responsibility of just the government to create jobs; the country needs a thriving culture for enterprise and entrepreneurship. While the government concentrates on creating an enabling environment by building the necessary infrastructure, businesses plan new plants or expand to new destinations for growth. Jobs are created, and they further create demand for goods and services. A cycle of economic growth is triggered.
Domestic savings play a crucial role in helping countries with the capital they need. The money we invest in equity shares or mutual funds or Public Provident Fund or even a fixed deposit enhances the ability of our economy to create that growth cycle and the momentum. The national gross savings rate in India is less than 20 per cent of our Gross Domestic Product (GDP) of just under $3 trillion or Rs 210 lakh crore. Despite such a low savings rate, India is growing at over 7 per cent per annum. The current growth in the Indian economy is supported by a healthy flow of foreign institutional investment or foreign direct investment over the past decade.
The Chinese economy is slowing today. However, it has grown at a near 10 per cent average annual growth rate for over two decades. It has had a savings rate that was in the mid-30s. It is currently lower at 25 per cent of the GDP; however, still higher than India and the US (12 per cent of GDP).
It is evident that future growth in the Indian economy has to get the support of domestic savings. Over the past few years, financial inclusion has surged rapidly in India. A combination of mobile internet and Aadhaar has unleashed a revolution. According to the World Bank Global Findex Survey of 2011 and 2017, India’s financial inclusion coverage has grown to over 75 per cent from less than 50 per cent. This survey measures the reach of at least a bank account or a mobile banking transaction across all countries in the world.
It is no mean achievement. The growth in domestic savings is slow and not adequate to help India grow faster at the desired rate of 9-10 per cent per annum. Indian households do not trust financial assets as much as physical assets. Over three-quarters of Indian households own only real estate and gold, according to a survey by the Reserve Bank of India’s Committee on Household Finance published in 2017.
What this means to you
Your money needs to grow steadily to help you beat the inflation rate. You want your savings to be worth enough to help you meet your personal goals. This column has advocated allocating a significant chunk of long-term savings towards equity or equity-linked assets like index funds. The Sensex and the Nifty have to be a crucial part of your financial journey. Index investing will allow you to track the returns of these benchmark indices. Over the past 15 years, the average return is just under 14 per cent for both the Nifty and the Sensex. It is well above the average inflation rate in the economy.
You need to start investing regularly and learn about aspects that influence the trend in these benchmark indices. Currently, the trend is primarily driven by prospects of a stable political outcome in general elections, the monsoon progress and future profitability of companies that form a part of these indices. If you are sitting on the side, you need to take that first step today. Setting aside money in fixed deposits, gold, government schemes like the Public Provident Fund or other projects are fine. However, you also need to think long-term and think growth. You can start by testing waters with a small
investment each month in an index fund.
As individuals, you may often wonder how a small investment made can make a difference. Your money creates space for businesses to make long-term growth plans by providing the capital. You can play a role in supporting their growth and benefit from the triggering of an economic cycle by investing regularly. That has happened before in the United States in the 70s. American companies were never left short of capital. At the same time, average American households have ensured that they created household wealth that continues to be the envy of the rest of the world.