like developed economies around the world, India too must channelise its household savings into the financial market in order to meet its huge infrastructure funding requirements
Currently, the balance sheets of infrastructure companies in sectors like power, roads, ports and real estate are stressed. They need additional funding to take up new projects and complete the unfinished ones. In their anxiety to complete some of the existing projects, real estate developers are taking loans from non-bank financial companies, that too at unaffordable rates, which range from 22 per cent to 42 per cent.
Financialisation of their physical assets, which is revenue generating, can provide them with some relief, which includes enhancing the prospects of the company’s balance sheet, transiting out of red. Individuals transform surplus, arising out of excess of income over expenditure, into the financial and physical savings.
Financial markets acquire depth and width, as the economy of the country matures and offers a variety of products. This helps the savers to choose from a mix of assets, to help notch-up good returns and de-risk concentration. The depth of the financial markets is enabled inter alia, by financialsation of physical assets, eventually increasing the proportion of financial savings over physical assets.
The US, Europe and other economies in the world, are marked by a high proportion of financial savings as compared to physical assets. Converse is the situation in India, and also in other developing economies. Preference for physical savings grows, if financial instruments deliver negative/marginal real rate returns, as by and large, physical assets act as a natural hedge against inflation.
Unfortunately, except equity, all other financial products in India like insurance, pension, fixed deposit, postal savings instruments, Government securities etc, deliver negative or very low real rate of return. Financial savings of India came down from 13 per cent in 2009 to 7.1 per cent in 2013, which in 2014 has gone up albeit marginally by three basis points to 7.4 per cent.
In fact, with the rise in inflation and collapse of equity markets, following the 2007 global financial crises, the proportion of financial savings started declining. Investment in physical assets, if not financialised, becomes a locked asset and does not benefit the economy.
Developed financial markets organise financialisation of physical assets and help the economy to benefit from multiplier effect of these investments.
Hence, financialisation of physical assets have found increasing favour across many economies as a means of capturing value that might otherwise get lost. This economic re-engineering can be organised in India by filling up some of the gaps in the creation and marketing of financial products.
Globally, real estate investment trusts are used to channelise and formalise investment in property, using capital market platform, with all the risk-mitigation measures that an exchange traded mechanism (such as novation) proffer.
Additionally, it makes the pricing of property transparent and market-driven, which is currently opaque. Similarly, infrastructure investment trusts can be floated for listing roads, ports, airports, railways, power projects. With credit enhancements, it will attract private — individual and institutional investments into the sector and fill the gaps of equity that constrains financial closures of the projects.
The last Budget facilitated the legislative and regulatory approvals. However, some last mile issues are yet to be sorted out, and the approval and listing of real estate investment trusts and infrastructure investment trusts remains in a limbo.
It is a pity, that this opportunity has been exported to some extent, and investors in overseas markets (such as Singapore) are benefitting from the opportunity of investing in the Indian property market; real estate investment trusts of India Bulls and Piramal are listed there.
Further, products like gold exchange-traded funds will remain a non-starter or under-penetrated if the size and liquidity do not take a shape. This can be achieved only if the insurance and pension funds in addition to individuals and corporates are allowed to invest in these products. Expansion of investment basket into these products will have number of benefits. It will facilitate the owners of physical assets to leverage revenue earning finished projects and create resources to invest in new projects/completing stalled projects.
Insurance and pension funds as also ordinary investors will have yet another avenue (with exit at will option) to notch-up a real rate of return, which today, is largely missing in fixed income securities. It will incidentally aid infrastructure building programme of the country.
These products will help develop, deepen and broaden financial markets and individuals in diversifying their portfolio even with smaller allocation. The liquidity and depth of the market of these instruments will certainly discourage individuals from investing into locked assets of the underlying products.
These products will financialise the existing investments in property and gold, and thus help mitigating at least partly concern of the policymakers. Finally, high multiplier impact of the financialised assets will enhance the growth of the economy.
Financialisation of assets, which has been work-in-progress for over a decade, deserves immediate focus. All the loose ends and last mile issues can be addressed by administrative decisions. However, it cannot be achieved in a short span of time, with the current pace. Hence, a committee, for creating a robust market of financialisation of assets — commence operations, promote marketing and add vibrancy should be constituted.
The committee should consist of market experts, in addition to representatives from the Government of India, Securities and Exchange Board of India, Reserve Bank of India, Insurance Regulatory and Development Authority and Pension Fund Regulatory and Development Authority. Aslo, a time-frame of three to six months should be given.
The committee will not take over the powers from the existing administrative authorities, but will help and assist them in taking appropriate decisions quickly by presenting cogent reasons with de-risking measures to ensure that adverse impact, if any of the decisions taken do not disturb the overall efficacy of the financial or any other market.
(The writer is former Chairman of the Securities and Exchange Board of India and the life Insurance Corporation of India)