Eco survey flags concerns over rising retail participation in heated market

Mcap-to-GDP ratio not necessarily a sign of economic advancement or sophistication, says survey

Chief Economic Advisor V. Anantha Nageswaran has cautioned against the surge in the financial markets, particularly the lofty market capitalisation-to-GDP ratio and rising popularity of the derivatives markets, in the Economic Survey 2023-2024.

A day ahead of the Union Budget, the Economic Survey gives a glimpse of the economic health of the country and can indicate potential policy decisions and allocations for various sectors.

Flagging the rapid growth in the stock market, Nageswaran said, “Financial assets are claims on real goods and services. If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience.”

The benchmark indices Nifty and Sensex have surged over 12.5 per cent this calendar year, while the total number of demat accounts has risen to over 150 million. Further, as of FY24, the number of unique clients or PAN-registered accounts on the National Stock Exchange has grown to 92 million, up from 27 million in FY19.

“The financialisation of economies has not ended well, even for advanced economies… Developing countries face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth,” notes the Economic Survey.

Citing that the market capitalisation to GDP (Mcap to GDP) ratio of India has gone much higher than other emerging economies like China and Brazil, Nageswaran notes, “It is essential to strike a note of caution. The market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication.”

India’s Mcap to GDP ratio has improved to 124 per cent in FY24 compared to 77 per cent in FY19.

The Economic Survey 2024 has also raised concerns about the rising retail participation in derivatives. This comes at a time when several financial regulators have cautioned investors against participating in speculative trading.

“Globally, derivatives trading loses money for investors, for the most part. Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading. A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives,” notes the survey.

The market regulator Securities and Exchange Board of India (Sebi) too has reiterated these concerns and is considering policy changes to curb speculative trading.