Tale of Two Deficits

Retail investors are often left in the lurch, at the losing end of games they are not party to

Ever since the 2011-12 Union Budget, the big question has been whether India’s gung-ho-on-growth Government is finally doing its bit to help the Reserve Bank quell inflation. “One factor [stoking inflation] among others such as international commodity prices and so on, is that there’s been very high government spending in the last three years,” says former Chief Economic Adviser and eminent economist Dr Shankar Acharya. “This, though, is not necessarily because the Government is motivated by a passion for growth,” he adds, “it’s because governments like to spend.”

The Great Recession of 2008-09 set off the recent round of deficit spending, and as the Indian economy recovered, what began as a stimulus started turning into overspending, which can be quite inflationary in a country constrained by supply snafus. But now that the Finance Minister pledges to spend less and crunch the fiscal deficit, his efforts should show up on the inflation chart in due course. Will they? “Fiscal consolidation is the right way to go,” says Dr Acharya, “But I’m not sure it’s adequate… I’m not sure if it’s going to work.”

While the fiscal deficit draws everyone’s attention in policy circles, there is this other deficit that does not deserve the neglect it suffers. Not the current account deficit, which has enough economists tracking it, but a stockmarket deficit that has been flashing distress signals for many years now: India’s missing retail investors.

According to Prithvi Haldea, CMD of Prime Database, there are nowhere nearly as many retail investors as there ought to be in a country with such a large market capitalisation (the trading value of all shares listed). They have been scared off by India’s half-a-million odd High Networth Investors, who seem to make off with most of the gains. “They are an elite unto themselves, well networked and in league with company promoters, executives, their employees, partners, suppliers, plus traders, brokers and so on, and very few of them make money through equity research and suchlike, as it should be,” he says, “This is because of the high incidence of insider trading and stock manipulation.” The upshot is that common retail investors find themselves left in the lurch, often at the losing end of games they’re not party to. “Which is why there are only 8 million of them,” adds Haldea, “while there should have been 50 to 100 million by now.”

Let’s face it, this deficit needs to be addressed with equal urgency.

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Aresh Shirali