Investors often compare India’s low stock market penetration to the United States of America (USA), where 14 per cent of households have a direct stake in stocks and almost 50 per cent of the households have a stake in the markets through indirect means, like retirement accounts.
Investors often believe that getting more households to invest in the markets can help Indian equity markets rise further up and drive financial inclusion. Several asset management companies are quite richly valued as investors expect strong growth as more investors are on-boarded.
Let us focus on the segment of population that can afford to invest. The individuals who pay income taxes can be a rough proxy for this figure. There are about 5.95 crore individuals who paid income taxes for the financial year 2021.
Therefore, out of the country’s population of 136 crore people, roughly 4.3 per cent of Indians have the financial firepower to invest in the markets - a far cry from the 50 per cent figure in the USA.
Even among the 5.95 crores people eligible to invest in the stock markets, 57 per cent earn less than 2.5 lakh per annum, implying a salary lower than Rs 20,000 per month. In contrast, only 8 per cent of these 5.95 crore people have an income of over 10 lakh per annum.
The figures make it quite obvious that the under-penetrated markets argument might not give us a true picture of India’s financial inclusion story. A better way to understand the market penetration would be to compare the people who already invest to the total number of people eligible to invest.
According to data provided by the National Stock Exchange (NSE), there are around 1.2 crore active clients, as of August 2021. The 1.2 crore active investors in a market of 5.95 crore people indicates a market penetration of 20 per cent – a figure that is quickly rising as more investors enter the markets.