Indian market volume vis-à-vis the size of the market is the lowest amongst major global economies, shows World Bank data for 2018. The so-called turnover ratio (cash market turnover divided by market capitalisation) for India stands at 58. In comparison, the ratio stands at 109 for the US, 174 for South Korea and 206 for China.
In a nutshell, market volumes exceed the market cap for these economies, while for India it is slightly more than half. Even smaller emerging market peers such as Brazil and South Africa score better, with turnover ratios of 147 per cent and 79 per cent, respectively.
According to the World Bank, India's turnover ratio at 58 in 2018 was a 43 per cent drop from 101 recorded in 2004. Brokers have attributed this drop to high trading costs, and increase in taxes such as the securities transaction tax (STT). Market experts said the introduction of STT in 2004 dramatically increased the cost of transaction on stocks, bid-ask spread, and also led to a rise in impact cost for investors.
Consequently, it has reduced liquidity and volumes in securities. Though the STT was levied when long-term capital gains tax (LTCG) was scrapped, it remained in place following the reintroduction of the latter in 2018, they said.
"The fact that you have STT, and that professional traders have to pay taxes for business income post-STT when they are charged at the maximum marginal rate, has led to double or triple taxation," said Rajesh Baheti, managing director of Crosseas Capital.
The lack of equity culture is among other reasons cited for the low turnover-to-market cap ratio.
"China has a higher turnover ratio than most developed economies, due to the high level of retail participation and a strong equity culture among HNIs in that country," said Deepak Jasani, head (retail research), HDFC Securities.
The domination of a few stocks in the overall market cap could also be affecting volumes, said Jasani.
“Over time, Indian markets have become concentrated. The share of the top 20 stocks in the overall market cap is very high,” he said.Market players added that the high cost of margins, coupled with high transaction costs, is keeping professional traders away.
In FY08, the government stopped treating STT as tax paid and began treating it as an expense, leading to substantial double taxation for those assessed under business income.
"If the cost of trade is way above the returns you generate, it does not make sense to deploy that money in the market," said Baheti.
The people cited above said the growth in India’s turnover hasn’t kept pace with the increase in the country’s market value.
In the past decade, India’s market cap growth has been close to 10 per cent annually. However, the annual growth in cash market turnover has been only 5 per cent, in comparison.