Global consultancy firm McKinsey has recommended moving Indian household savings in physical assets like gold and real estate to financial assets to increase the flow of financial savings to domestic equity markets.
According to McKinsey, 70 per cent of Indian household savings are in physical assets like gold and real estate.
Naveen Tahilyani, partner, McKinsey, addressing delegates at a FICCI conference on capital markets on Wednesday, September 7, said, “Savings in gold is not productive because it doesn’t flow into the financial system; the investments in gold and real estate by Indian households is purely for returns.”
For moving physical assets to financial assets, the McKinsey report suggested creation of gold-backed capital market products like exchange-traded funds (ETFs) and gold saving schemes (GSS) that replicate the risks and returns of physical gold.
“Real estate investment schemes (REIS) should be launched to address investor need not fulfilled by present alternatives like real estate PMS (portfolio management service),” the report said.
“REIS can take the form of pooled investments in both upcoming and existing commercial properties, to cater to different classes of investors; investors with lower risk appetite can invest in ready properties for assured rental income, and investors with higher risk appetite can invest in upcoming properties for capital appreciation,” the McKinsey report said.
Gold ETFs, since their launch in 2007, are gradually becoming popular among investors. GSS is a new product where investors can invest in smaller denominations of Rs.100 or Rs.500 per month to build their gold portfolio.
Kotak, Reliance and SBI Mutual Fund have launched GSS schemes.
The report recommended players to focus on customer education on gold ETFs and GSS and independent financial advisers to deepen retail participation.
McKinsey also suggested activation of broker sales channel to increase the distribution of gold ETFs because the margins on ETFs are the same as cash equities.
With the glitter of gold all around, proportion of household savings flowing into the equity markets has reduced from about 8 per cent of total savings in FY05 to 4 per cent in FY10.
According to the report, out of Indian household savings of Rs.15,50,000 crore in FY10, 6 per cent is in gold, 35 per cent in real estate and 26 per cent in bank deposits.
Indian households have the highest savings rates in the world. Household savings rates have increased from around 11 per cent in 1980 to over 35 per cent today.
However, the stock of physical savings in India is significantly higher than that for other economies: India (70 per cent), US (33 per cent), Germany (50 per cent) and Malaysia (34 per cent), the report said.
Savings in financial assets are dominated by bank deposits and insurance, with only about 8 per cent of all financial savings moving to the capital markets in FY10.
“Over the next four years, India will require Rs.110,00,000 crore to ensure GDP growth of 9 per cent from the next financial year, while most of this requirement will be met by internal accruals, bank credit and foreign borrowings, a gap of around Rs.20,00,000 crore has to be bridged by the capital markets,” the McKinsey report said.
“But based on the present capital market structure and growth rate, only around Rs.10,00,000 crore can be funded from the capital markets, which leaves a gap of about Rs.10,00,000 crore, which will require deepening of the capital markets,” the report said.
