Investment scheme aims to push Indians from gold into stocks

By Himank Sharma and Arup Roychoudhury  /  Reuters, MUMBAI and NEW DELHI, India

Sun, Nov 11, 2012 - Page 14

A year ago, S. Kashinath, an illiterate laborer from India’s southern Tamil Nadu State, lost 300,000 rupees (US$5,600) in savings he invested in a pyramid scheme promising high returns from emu farming.

Now, Kashinath, and about 23 million other low to middle-income Indians are being courted by a government scheme to boost investment in local stock markets.

The recently introduced Rajiv Gandhi Equity Savings Scheme — named after the popular former Indian prime minister who was assassinated in 1991 — offers Indian investors earning less than 1 million rupees (US$18,600) a year a 50 percent tax break on stock investments of up to 50,000 rupees.

However, Kashinath thinks the plan has as much chance of flying as the birds he bought into.

“I can’t even read or write. How do you expect me to buy stocks that I don’t understand? My money is stuck, but once I get it back, I’ll open a bank account to keep it safe,” he told reporters by telephone.

The ambitious scheme, which aims to broaden share ownership, re-energise an unprofitable mutual fund industry and bring structure to a patchy investment landscape, faces formidable barriers — not least India’s love affair with gold.

At more than 30 percent, India has one of the world’s highest savings rates — more than double the US — and the bulk of the nation’s US$800 billion in savings is parked in gold. India is the world’s biggest gold buyer and holds US$1 trillion of the precious metal, World Gold Council data shows — more than the combined military spending by the US, China, Russia and Britain.

“Gold holds an emotional charm for most Indians. Those are some big shoes to fill for any sort of investment,” said V. Ramesh, deputy CEO of the Association of Mutual Funds in India.

Indians also save cash, in bank savings or certificates of deposit, and increasingly invest in property.

Buying shares does not figure for most. Fewer than 5 in every 100 Indians buy equities either directly or through mutual funds, regulatory data show, compared with Gallup’s estimate of more than half of Americans.

The investment scheme is the brainchild of Thomas Mathew, a former finance ministry official, who reckons more than 23 million Indians could be eligible targets. If they all invest the maximum amount, there could be a potential inflow of 116 trillion rupees.

Yet fund managers say it will be costly and difficult to tap into these millions of small, and often skeptical, investors, many of whom live in rural areas and do not trust big city stock markets.

While the scheme could help reduce gold imports and the damage that causes to India’s current account deficit, the government also hopes to reduce market dependence on volatile foreign flows. India first allowed foreign investors to buy local shares in 1992 and they now hold nearly one-fifth of the total, Morgan Stanley data show.

Critics say the scheme could draw ordinary citizens into reckless investing as they have little or no expertise in stock buying. The government is trying to reduce the risks by allowing investments only in the top 100 stocks and encouraging people to buy shares through mutual or exchange traded funds.

India’s stock markets are notoriously volatile. The benchmark BSE index has risen or fallen by a double digit percentage rate in 18 of the past 20 years — it is up by more than one-fifth so far this year. That instability has driven out many retail investors. Outflows from equity mutual funds in India reached a two-year high in September as investors cashed out of a stock rally.

“The Indian stock market is a bottomless pit. Why would I risk my money on shares when I can get 8 to 9 percent on fixed deposits?” asked Harshala Apte, a primary schoolteacher in Mumbai whose father lost more than half his net worth in a bear run on the stock markets in 2009.

That said, fund managers say they will consider the new scheme, despite the additional costs.

“It’s a collective failure on our part that in a country of 1.2 billion people our combined assets are what? Some 220 billion rupees,” JPMorgan Asset Management India CEO Nandkumar Surti said.

Longer-term, the new scheme may herald a shift in India from what one fund manager executive calls an opportunistic model of attracting investors, to a structural one, emulating the 401k pension model in the US.

For now, India does not allow mutual funds to develop pension plans, instead using a state-managed provident fund that invests mainly in government bonds. Until such a plan is brought in, the government is likely to struggle to win around people like Kashinath, who is still smarting from his emu bet.

“Can you help me get my money back? There’s a new bank that’s promising good returns, I’ll probably put it there,” he said.