A typical growth cycle of a country includes higher incomes translating into higher savings. These higher savings lead to even higher investment. That further leads to more high-paying jobs and more people with even higher incomes. Such a cycle needs to go on like an assembly line in a factory for economies to grow.
In the case of India, systemic shocks since 2013 have disrupted that virtuous cycle, opines Morgan Stanley, a global bank, in a new report last week. While the report does not single out those shocks, one can safely assume that those include demonetisation, goods and services tax rollout and the lockdowns enforced during the pandemic since March 2020.
The sharp fall in growth was not followed by any quick recovery in investments, especially in the private sector. While large private corporations are using their balance sheet muscle to sustain themselves despite a slump in demand for goods and services, small and medium-sized businesses, continue to suffer. They create jobs in large numbers and presently are unable to do so. That presents a significant challenge, and this column has argued that the government needs to do more to improve the delivery of credit or grants to small businesses.
There is a lot of chatter in the analyst world that India needs to boost manufacturing due to problems due to sour trade relations between China and America. However, that is a big challenge on the ground. A lot has happened during the pandemic.
At least three foreign companies — Harley Davidson, General Motors and Ford Motors — have stopped the assembly of vehicles in India. That is a terrible news. Not only it puts out factory workers directly employed by these companies out of work, but a whole chain of auto-ancillaries and related services also faces a business cut.
What it means to your money
While the government continues to find a way out, you need to identify pockets of growth. Your money needs to grow for you to meet your life goals. There is merit in identifying sectors that would create more jobs. They are more likely to witness faster growth than sectors where demand is slow. Financial services, consumer technology, agriculture supply chain, and related technology are areas where new money is currently invested. Venture Capitalists invested close to $17 billion between January and July of 2021 in companies like e-commerce companies like Flipkart, education-oriented ones like Byju’s and upGrad and many others in India. That is second only to China, according to reports.
The key to your success is appropriate asset allocation. In your investment habits lies an opportunity. A lot of you have started to dabble in the stock market. The number of demat accounts opened lately indicate a significant surge like never before. For almost two decades, the total demat accounts in India hovered between two crore and 2.5 crore. It has suddenly jumped to near seven crore over the past two years. There was a boost to stock market trading during the pandemic. However, mobile technology is a significant enabler.
A similar expansion of the market was witnessed in the insurance sector, mutual funds and retail banking. Even after that, India remains a significantly ‘under-serviced market for financial services. In comparison to the world, fewer people have access to them. That presents an opportunity for growth.
If you can study businesses and buy individual companies that you think would grow with the economy, you must do that.
Your long-term savings must be channelised into funds that target growth businesses. Equity markets tend to outperform all other asset classes in the long term. Two things influence equity prices. These include the nation’s economic growth and interest rates. All predictions suggest the country could be on the road to recovery after a dramatic fall in growth in 2020. Interest rates are most likely to remain low too. That should allow small and large businesses to bounce back.
If you are not into direct investing, you must give equity mutual funds or exchange-traded funds a chance. Your retirement savings can benefit from the growth in equity assets.
2-2.5 cr Demat a/cs in india for 2 decades
7 crore Demat a/cs in india in last 2 years
Finding pockets of growth
Your money needs to grow for you to meet your life goals. There is merit in identifying sectors that would create more jobs. They are more likely to witness faster growth than sectors where demand is slow
(The author is editor-in-chief at www.moneyminute.in)