Winning back the aam investor

It is also instructive to see how the irresponsible conduct of financial services at a micro level ends up creating macro distortions in the economy, which eventually assume structural dimensions. As I said earlier, the permanently higher and worrisome current account deficit owes partly to the additional gold buying over the past two years.

More broadly, the finance minister needs to restore the confidence of the middle class investor who now have little faith in anything other than gold and real estate as the means of preserving and growing her savings. In recent years, additional inflows into equity mutual funds have also stagnated because the small investor has generally become wary of the equity markets. The average annual returns over a five-year period — since January 2008 — given by some of the better known equity mutual funds are in the range of 5 to 7 per cent. The investor would naturally wonder whether it would have been far better keeping the money in fixed deposits.

The budget must also tackle another critical issue that might indirectly help in addressing the troubling inflation question, which is also responsible for macro distortion in savings patterns. No one so far has been able to clearly explain why inflation has structurally remained so elevated for so long when GDP growth has slipped to 5.3 per cent. After the 2008 global financial meltdown, there was a fundamental shift in thinking among central bankers around the world. It was generally accepted that the asset price bubble (such as in real estate) could have a long-term impact on inflation and that central banks and governments must use appropriate instruments to mitigate asset bubbles that might permanently feed into higher inflation. As part of this exercise, the RBI had conducted a preliminary study of real estate prices and land transactions across scores of Indian cities. One is not sure what came of that exercise eventually.

... contd.

ALSO READ

Everyone loves food security

'We don't appreciate each other... When people ask me to quit, do you think it doesn't affect me? And how often do you want me to resign?'

National Interest: BJP's troubled House

No yuan for growth