Darwinism of Financial Sector in India

Darwinism of Financial Sector in India

                                      -by Abhishek Maity

 

In India a lot development is underway in varied fields to achieve the goal of a self-reliant India and reaching the target of a 5 trillion U.S. dollar economy by 2024-25, currently the value of the Indian economy is around $3.1 trillion which implies that accomplishing the desired objectives will not be a challenging task though a few structural impediments still exist which need to be figure out.

The most important is the finance sector as we know it performs the activity of allocating scare resources to the best possible usage in the economy. Though the Indian finance sector has grown at 15% in the past few years exhibiting stability as compared to the other Asian markets with a market capitalization of $5.59 trillion which is still less when compared to the developed nations in the western regions like the U.K. having a finance sector with market capitalization of $36.4 trillion which shows that there is still a long way for India achieving the prominence in the global economy as second-best alternative for investing money. For making the finance sector more efficient and coherent the Indian government has undertaken a lot of reforms in the last couple of years.

The most prominent being the construction of the Gujarat International Finance Tech (GIFT) city in Gandhinagar as India’s first International Finance Service Centre (IFSC). IFSC caters to customers outside the jurisdiction of domestic economy, dealing flow of financial services and products across the borders. Currently there are over 200 entities in the city with over 12,000 people working for these institutions whose main purpose is to deal with foreign trade and currency related to India within its domestic borders. The ease of doing business along with a competitive tax regime and quality infrastructure makes GIFT an attractive value proposition, according to a Sections report there has been around 62% rise in the number of entities operating in the city with banking transaction exceeding $125 million last year, recently Axis bank sold its additional tier-I bonds from the GIFT city. As Gujarat Chief Secretary Pankaj Kumar, the average turnover on the international exchanges in the GIFT city exceeded USD 4 billion levels. Such measures ensure there occurs positive externalities and proper flow of information among the cluster of large number of financial institutions which addresses the harmful effects of the asymmetric information which tends to disrupt the working of the finance sector in most of the developing countries, as such initiatives reduce the monitoring cost while improving the quality of products sold in such countries.

Another evolution which is underway in India is the large-scale adoption of existing investing products along with the blossoming of innovative finance products. According to a Mint report the asset under management (AUM) of passive investment schemes like index funds or exchange traded funds (ETF) has increased from around  $2billion five years ago to around $24 billion at present this along with the fact that a close to 2.4 million demat accounts were opened in the first quarter of 2021 shows that Indians are trying to earn high returns by shunning off some traditional saving products like bank savings and the government sponsored investment schemes which offer lower returns and don’t protect the holders from inflation. The integration of the Indian economy is also making the adoption of structured finance products, investment trusts, bonds, and other inventive finance products much easier and attractive to the investors both institutional and individuals in India as well as in foreign countries. Recently SBI became the first ever Indian bank to raise funds through Formosa bonds as per an economic times report, to support the expansion of the bank in overseas markets. Formosa bonds are usually issued in Taiwan by the multinational companies to raise capital, but such bonds are denominated in a currency other than the new Taiwan Dollar.

 Then the prevalence of real estate investment trusts (REIT’s) in India is another instance of the transformation of the finance sector along with a positive externality towards the real sector. ( REIT’s) are a type of company which owns, operates and finances income generating real estate properties through capital base which is pooled from a number of investors and distribute the profits as dividends to the investors who then can exchange the shares of these REIT’s on any trading exchange. As per money control report currently there are 3 REIT’s operating in India are covering around 87 million sq. feet of real estate, with a portfolio occupancy rate of 80% and a weighted lease expiry of seven years which shows that the risk of high vacancies is lower as compared to usual risk attached to real estates outside the ambit of REIT’s.

Because such products make sure that even the retail investors get to participate in the real sector which tends to increase the market size for the real sector and hence increase the liquidity for such assets in India. Since the real sector in India makes less than 10% of its GDP whereas the real sector constitutes around 20% of the USA economy which shows that REIT’s can be a step towards ensuring efficient functioning of the real sector in India.

All this is evident of the fact that there is expansion of the finance sector in India which is something different from the impact technology is having in the world of finance. Such evolution like developments of the corporate bonds sector in India, awareness of the shares and securities market among the young population and a record number of around 63 companies raising Rs 1.19 trillion from the share market in 2021 is an indication that maturity of finance sector has begun which is one of the major stepping stones to achieving the objective of a self-reliant India.