Economic Survey Acknowledges Rise Of Retail Investors, IPO Boom; Cautions Against F&O Trading

The Economic Survey 2023-24 has cautioned against including sensitive food commodities like common rice, wheat, and most pulses in futures trading until markets are more developed, even as the government expands the list of commodities eligible for derivatives trading.

Capital markets are becoming more prominent in India’s growth story, with an expanding share in capital formation and investment landscape on the back of technology, innovation and digitisation, Economic Survey added.

Economic Survey 2024 Live Updates

For F&O trading, the survey stated that derivatives trading holds the potential for outsized gains. Thus, it caters to humans’ gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading. However, globally, derivatives trading loses money for the investors, for the most part, the survey added

Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading, the survey noted.

“A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives. Investors’ behavioural response would be to feel ‘cheated’ by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy,” it stated.

The pre-budget economic survey, tabled in Parliament, stated: “Sensitive commodities may be kept outside the ambit of the futures market until the markets are developed and the regulator has a higher degree of comfort in diversifying the portfolio.”

It suggested that agriculture futures markets should focus on “less sensitive commodities” such as oilseeds, cotton, basmati rice and spices.

As part of recent policy initiatives to broaden the commodity derivatives market, the government expanded the list of commodities eligible for derivatives trading from 91 to 104 commodities on March 1, 2024.

The new additions include apples, cashews, garlic, skimmed milk powder, white butter, weather and processed timber products.

The survey emphasised the need for “stable policies with minimal interventions” once regulators provide clear direction on commodity choices.

It also highlighted the potential role of Farmer Producer Organisations (FPOs) in linking small and dispersed farmers with commodity markets.

The survey called for government, Sebi and commodity exchanges to promote FPOs across various agri-commodity segments.

“Skilling and hand-holding the FPOs through financial literacy initiatives can go a long way in encouraging the farmers to benefit from the Agri-derivative markets,” the survey noted.

In the long run, as market depth and liquidity increase, the survey suggested that banning futures trading may no longer be necessary to stabilise prices unless there is data-backed evidence of futures trading driving up price volatility.

The survey recommended that regulators closely monitor futures markets and conduct regular reviews, considering fluctuations in domestic production, consumption and global trade.

Capital Markets In India’s Growth Story

Further, Indian markets are resilient to global geo-political and economic shocks, it added.

“Despite heightened geo-political risks, rising interest rates and volatile commodity prices, Indian capital markets have been one of the best performing among emerging markets in FY24,” the Economic Survey said.

The BSE benchmark Sensex and National Stock Exchange’s Nifty 50 have given stellar returns to investors in the financial year 2023-24.

The Nifty 50 index surged by 26.8 per cent during FY24 against a decline of 8.2 per cent during FY23. Additionally, 30-share Sensex has soared around 25 per cent in FY24.

Moreover, the uptrend continued in FY25, with the 30-share index on July 3 touching the 80,000 mark in intra-day trading for the first time.

Further, significant interest from domestic and global investors in the Indian stock market as an attractive investment destination and sustained IPO (initial public offering) activity placed the Indian market fifth in the world by market capitalisation in FY24.

India’s market capitalisation to GDP ratio has improved significantly over the last five years to 124 per cent in FY24 compared to 77 per cent in FY19, far higher than that of other emerging market economies like China and Brazil.

The survey said it is imperative to strike a note of caution as market capitalisation to GDP ratio is not necessarily a sign of economic advancement or sophistication.

Indian capital markets have witnessed a broad-based expansion across various sub-markets, with the country’s equity market capitalisation reaching Rs 415 lakh crore or USD 5 trillion in May 2024, placing it fifth in the global rankings.

Technological advancements and regulatory measures have fuelled a remarkable surge in retail investor participation in the capital market.

Retail Investors Rise

At present, there are over 9.5 crore retail investors and have nearly 10 per cent direct ownership of the market through its almost 2,500 listed companies.

Amid healthy domestic economic performance and a favourable investment climate, primary markets remained robust during FY24, facilitating capital formation of Rs 10.9 lakh crore compared to Rs 9.3 lakh crore in FY23.  Of the total fund mobilisation in FY24, 78.8 per cent was raised through debt issuances.

Fund mobilisation through all three modes — equity, debt, and hybrid — soared by 24.9 per cent, 12.1 per cent and 513.6 per cent, respectively, in FY24 compared to the previous year.  Within the equity segment, funds were raised through the IPO, qualified institutional placements (QIPs) and rights issues.

IPO Boom

The number of IPOs rose 66 per cent in FY24 to 272 from 164 in the previous financial year, while the amount grew by 24 per cent to Rs 67,995 crore in FY24 from Rs 54,773 crore in FY23.

Apart from the main-bourse, SME platforms at the exchanges witnessed heightened activities during FY24 as the number of IPO or FPOs (follow-on public offers) rose to 196 in FY24 from 125 in the preceding fiscal.

The fundraising by SMEs increased to Rs 6,095 crore in FY24 from Rs 2,333 crore in FY23. Resource mobilisation through rights issues more than doubled to Rs 15,110 crore during FY24 against Rs 6,751 crore in the previous year.

Additionally, the survey said, “The corporate debt market in India is going from strength to strength”.

In FY24, the value of corporate bond issuances increased to Rs 8.6 lakh crore from Rs 7.6 lakh crore during the previous financial year.  With the debt category, the number of corporate bonds public issues in FY24 was the highest for any financial year so far, with the amount raised at a four-year high of Rs 19,167 crore.

Moreover, private placements remained the preferred channel for corporates, accounting for 97.8 per cent of total resources mobilised through the bond market.

The survey attributed increasing investor demand and the rise in the cost of borrowing from banks as key factors that made this market more attractive for corporates for funding requirements.