Does stock market investing helps in growth of the economy or is it a indicator of the state of the economy? If consumers are allocating surplus funds to stocks and mutual funds instead of consumption, isn't that paradoxically harming the economy?

This is a good question and that's the reason for me to answer.

A word of caution - we have to dive a little deeper down into the fundamentals of economics to understand the subject and get a proper answer.

My answer to the question - No, I do not think that stock market investing benefits the larger economy in a major way. Does it reflect the state of the economy? My answer is again “No”. I strongly believe that stock market investment and mutual fund investments are largely detrimental to the economy and wasteful investments in the Indian context. It neither pushes consumption nor helps in capital formation. It doesn’t even help in industrialization. I know with this statement of mine, there will be several hands raised to challenge my argument. I would say - please hold on.

It is estimated that only 3% of Indian households are actively investing in the stock market. This seems to be low if we compare it with the developed economy.

• United States of America - 55%
• United Kingdom - 33%
• China - 13%

Does it signify that to be a developed economy more households should invest in the stock market? Not necessarily. Let me explain the stock market investment mostly bank of two sets of parameters. 1. Bank Interest Rate and 2. Per capita Income leads to disposable income in conjunction with purchasing power.

Let’s take the example of the US. Where in general Federal interest rates are 1% or below. As such depositing money in the bank is not a very attractive idea as the yield is very low. So people have to look for alternate investment opportunities. And that is the stock market investment to get a higher return. The US also satisfies the second condition of high per capita income and reasonably stable purchasing power. High per capita income is a very essential condition since you have to have sizable disposable income that could be spared for investment.

The GDP per capita (current US$ 2022) - United Kingdom is $ 46,125.3. The GDP per capita (current US$) - United States is $ 76,329.6. For China, it is $12,720.2. For India, it was $2,410.9 in 2022. These figures perfectly match the percentage of share market investment share above. So it is largely dependent on the per capita income.

Interest on deposit accounts in China from 2009 to 2022

The interest on bank deposit rate in China has been stable at 1.5% since 2015. This together with the increase in per capita income has contributed to the growth in the share of households investment in the stock market. These two factors largely contribute to the growth in stock market investment. If we leave aside 2021 the GDP growth rate of the US has been around 2% over the last twenty years. Over the last 20 years, the GDP growth rate of the UK has also been around 2%, mostly below 2%. But both for the US & UK we see very high shares of household investment percentage in the stock market. This clearly proves that the growth in the share market investment doesn’t have any correlation with the GDP growth. Neither does it contribute to the GDP growth, otherwise, the US & the UK would have achieved very high GDP growth. Nor does it contribute to the industrial growth. Because high industrial growth would have reflected in high GDP growth.

The economies like the US & UK have very limited scopes left for investment in the industrial segment. There is very little credit demand from the banks. So the Federal rate has been mostly very low. However, we have seen a very high interest rate in 2022. The benchmark Federal borrowing rates have been tagged between 5.25%-5.5%. This is predominantly to cut down the inflation fuelled by the increase in currency volume by $ 5 Trillion in 2020–21. But these increases in the interest rate have also dealt a severe blow the US banks. Sometime back one of the largest banks in the US, the SVB went for bankruptcy.

The problem for the Indian banks is also very complex. A very large share of their capital has been eaten up by writing off bad debt and fresh creation of NPA. Indian banks have already written off around 14 lakh crores of bad debt in the last ten years. Even after this, the NPA is hovering around 6 lakh crores and another 3–4 lakh crores stressed assets. This has created a tremendous liquidity crunch for the banks. Secondly, they have been hit by a lack of savings mobilization.

As per the Oxfame report the top 10% of the Indian population holds 77% of the total national wealth. The balance of 90% population holds only 23%. The top 5% richest Indians own more than 60% of the country’s wealth. With so much accumulation and concentration, savings and capital formation are largely dependent on the top 10% of people. However, this section of people is going for investment in the speculative market.

NYSE Composite Index is 16,770.45 as of 22nd December last closed. The calculation of the New York Stock Exchange index is a little bit complex. So I would avoid going into the calculation part. However, the NASDAQ 100 Index (NASDAQ Calculation) comes close to the overall NYSE composite index. (this section is for people who are aware of the stock market indices)

In India, there are two prominent Indian indexes - Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of the top 30 firms listed on the BSE. Sensex was created in 1986 and provides time series data from April 1979, onward. We have two major stock exchanges the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Another index is the Standard and Poor's CNX Nifty. Nifty includes 50 shares listed on the NSE. It was created in 1996 and provides time series data from July 1990, onward. Basically, you can say that Sensex provides the BSE Index and Nifty provides the NSE index. However, all major shares are listed in both BSE and NSE.

S&P BSE Sensex closed at 71,106.96 on 22nd December. Whereas the benchmark Shanghai Composite Index closed at 2,905.79. Shanghai Composite Index is the main index of the Chinese stock market. What I wanted to point out is the Sensex index is much more inflated looking into the size of the economy. Just compare the Indian Sensex and Shanghai Composite Index and you will understand whether the stock market in India represents the state of the economy or not. Indian stock market index is very highly inflated. In 2008–09 when the Nifty and Sensex crashed by 50% points, the Indian economy didn’t crash. Following are the GDP growth rates for two consecutive years when the world economy crashed.

You can see how the US economy crashed in 2008 & 2009. Their share market crash and economy crash picture matches. But the Indian economy managed to grow by 3.1%. And in 2009 the GDP growth jumped to 7.9% despite the Nifty and Sensex crashing by 50% points. Can you see the disconnect? When it comes to the Indian economy we can not rely on the stock market index to throw a reliable picture of the economy. So in the Indian context, we have to see both the Nifty and Sensex detached from the actual position of the economy. Both the fall and the growth of the Indian stock market are not reliable indicators of economic growth or fall.

I have already shown above in the case of the US and the UK markets that a larger volume of investment in the stock market does not help the economy to grow. Despite 55% households of in the United States of America investing in the stock market, their GDP growth has been restricted to around 2% over the last 20 years. In India, the bank interest rates are falling. So more and more people are being compelled to look for high-yielding investment options. However, even though investments in mutual funds and stock markets have gone up the investments in IPO & FPO are less than 1% of total investment. So practically its contribution to industrial growth or in capital formation is negligible. Neither of these investments could be considered savings mobilization. 99% of investment goes into the trading of equities which doesn’t help any production, demand, or consumption growth nor does it help in capital formation.

The stock market investment generates some tax revenue for the government. The average annual return from the stock market investment in India is around 10%. To that extent, it could be helpful for the economy. However, most of the return is re-invested, so it doesn’t help in demand generation. So in my personal view, I believe that increasing the volume of stock market investment hardly helps the economy. Rather it is a sign that the economy is losing its shine and people are forced to invest in the speculative market. It could be detrimental to the banking system.

So I would stick to my stand that I strongly believe that stock market investment and mutual fund investments are largely detrimental to the economy and wasteful investments in the Indian context. Another very big fallacy of the stock market growth is that it inflates the rate of certain equities beyond any rational. Which is grossly detrimental to the economy as well as to the investors - both individual and institutional. We get a completely distorted view of the market cap.

The Indian banking system is getting hit on multiple heads. Largescale capital demand and investment are being met by FDI, FPI, external debt (soft loan at much lower interest) loans from the World Bank, IMF, ADB, etc. So the Indian banks lose out on interest earning. The pressure of writing off bad debt and the pressure of NPA. The low savings mobilization and poor credit demand. The usual banking functions have also been taken over by the digital payment mode. Plus over-investing in inflated equities puts the bank, financial institution, EPFO, etc under great risk. The more risky part is that these investments are not through the IPO/FPO route. They are through the trading route. The question also speaks about increasing consumption. Unfortunately, the top 10% of richest people in India contribute only 4% of GST collection. This is despite them holding 77% of the total national wealth. This means they are neither helping in consumption nor in generating tax revenue.

My answer ends here. However, people can go a little deeper into the subject if they want to build up a composite understanding of the subject. We have three different kinds of foreign investments - FDI( Foreign Direct Investment), FPI ( Foreign Portfolio Investment), and FII (Foreign Institutional Investment) FDI is structural and a long-term investment by a firm or individual into business interests located in another country. I said FDI structural as it decides the ownership structure or format of the organization securing operational and management control/stake. And it is less volatile in the sense that the withdrawal of FDI is a complex matter.

However, FPI and FII investments are floating in nature, which means they are volatile and their withdrawal could be sudden.

Foreign Portfolio Investors (FPIs) are those foreign investors investing in Indian financial assets, including shares, bonds, debentures, etc. FPIs include investment groups of Foreign Institutional Investors (FIIs), Qualified Foreign Investors (QFIs) subaccounts, etc. Individual investors do not qualify for investing directly under FII. They have to invest through the Subaccounts routes. Subaccount means a person resident outside India, on whose behalf an FII proposes to invest in India. FPI includes all investment categories which makes portfolio investment including FII, small investors included under QFI, and miscellaneous investment entities. QFI means a person who is either a resident of a country that is a member of the Financial Action Task Force (FATF) or a member of a group that is a member of FATF; and/or a resident of a country that is a signatory to IOSCO’s MMOU or a signatory of a bilateral MOU with SEBI.

FPI = FIIs + QFIs and other small investors.

The FII invests on behalf of its Sub-account), Qualified Foreign Investors (QFIs) as well as Non-Resident Indians (NRIs). The following categories of investors fall under the FFI - Overseas pension fund, mutual fund, investment trust, insurance company or reinsurance company, International or Multilateral Organization/agency, Foreign Governmental Agency, Sovereign Wealth Fund, Foreign Central Bank Overseas asset management company, investment manager or advisor, bank or institutional portfolio manager.

Anyway, foreign investment is not part of the question So I am not going deep into it and its impact on the stock market as well as on the economy.

Can we compare the collapse of Silicon Valley Bank in America with the collapse of Adani's net worth?

The question is not correct Adani group has not collapsed yet. Secondly, both are not of comparable nature, though some so-called literates are jumping that - see what happens in the US and why that Hindenburg fellow didn’t make a report on this. However, I don’t blame them since they neither understand Adani's business and they are definitely not in a position to understand why an American bank failed. These are the same section of people who always argue that it is not the business of the government to do business because according to them the government and the public sector are not efficient to run business. My question to them is - then how do they define this failure of the Silicon Valley Bank a private bank in the Mecca of capitalism -the USA? It is the same USA that is teaching us capitalism and we are blindly following them. My question would remain unchanged even if our teachers were Adani or Ambani. Then they have to explain why Anil Ambani and so many others failed. the list is not very small. Rather the bankruptcy list is quite long. And the money lost is all our public money

"Till 31st July, 2022, the the Insolvency and Bankruptcy Board of India (IBBI) had received 6,231 such complaints and grievances, of which 6,172 have been disposed” Just let me tell what these bankruptcy means to the economy, to the banks and to the public…

“Anil Ambani, the world’s sixth-richest person in 2008 with wealth of $42 billion, pleaded bankruptcy before a London court in September 2020. He lost the flagship Reliance Communications Ltd (RCom) and Reliance Naval and Engineering. Four other companies — Reliance Infrastructure, Reliance Power, Reliance Capital and Reliance Home Finance”

People would possibly know Venugopal Dhoot, 69, who built consumer durables company, Videocon Industries Ltd (VIL) “Dhoot, whose personal wealth was $1 billion-plus in 2015, has lost all major businesses — consumer durables, telecom, oil exploration — to insolvency. In August 2019, the National Company Law Tribunal (NCLT) consolidated resolution processes for all 13 group companies, which had total admitted claims of Rs 64,838 crore. In October 2020, the Dhoot family offered lenders Rs 30,000 crore to withdraw the insolvency proceedings. But the creditors decided to sell the assets to a Vedanta group company, Twin Star Technologies, for Rs 2,962 crore, taking a haircut of over 95 per cent.”

A haircut means taking a loss. A 95% haircut means a 95% loss or discount in the asset price. And that is another area of huge corruption & dirty game. All such asset liquidation happens at a throwaway price. I have cited just two of the above cases out of thousands of bankruptcy and insolvency cases. And these are all pertaining to tenure under Modi rule and after the new IBC code released in 2016. As many as 1,999 cases of corporate insolvency resolution process as of July 2022. People can jolly well understand what kind of financial loss as well as job loss India suffered. All these organizations were run by capitalist individuals only who shouldn’t have suffered for efficiency. So selling public sector organizations to private individuals, particularly the profit-making ones can not have any justification. Privatization doesn’t give any guarantee against failure nor assurance of the safety of our money.

I have always been against wholesale bank privatization. Because it is our money that will be at stake. And the government has no right to put our money at risk. privatisation is definitely not a solution otherwise the US bank wouldn’t have failed. Neither this is the first time a US bank has failed. As you know SVB is the biggest U.S. lender to fail since the 2008 global financial crisis – and the second-biggest ever after Washington Mutual Bank in 2008. Washington Mutual Bank had an asset base of more than $300 billion. Between 2008 and 2012, the Federal Deposit Insurance Corporation (FDIC) closed more than 465 private banks in the US. However, a few were selectively saved by the US government through the Federal Reserve equivalent to RBI in India. People could be aware of the collapse of Lehman Brothers Inc. Before filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United States founded in 1847. At the end of 2022, SVB was the 16th-largest bank in the United States with $209 billion in assets and $175.4 billion in deposits.

Silicon Valley Bank, which predominantly catered to the tech industry for three decades, collapsed on March 10, 2023. Why did it fall? Possibly many would know the reason. A few days back I wrote an article on the increase in the US Federal rate of interest and its negative impact on the US economy. I generally don’t write about the US economy, otherwise, possibly I would have written about the danger much earlier. However, I have been writing on Adani for the last one and a half years. The viewers who have read it would be able to connect this answer better. I wrote that the US economy is also bleeding because of the huge burden of interest payment which has grown by around 500% from 0.75% in Feb 2021 to 4.75% in Feb 2023. I don’t think many in India pointed out this angle. Though I didn’t anticipate the impact to come so soon. During COVID-19, the US printed some additional $ 5 trillion in currency. A major part of this volume got invested across the globe since the federal interest rate was low. But from September 2021 the federal rate started rising in an effort to quell the inflation. The problem of rapid increase in interest rates intensified in 2022 and 2023.

And deposits started pouring back into the US. The commercial banks started raking up huge deposits. SVB’s assets and deposits almost doubled in 2021. However, there were very few opportunities to lend out such huge deposits and the banks started reeling under the huge cost of interest payment. Something similar to what the Indian banks are suffering. So, what SVB could not lend out, had to invest in ultra-safe U.S. Treasury securities. However, the game started here. The US Treasury has a typical way to balance out the high-interest cost by cutting down the value of these bonds & securities as the interest cost goes up. On the contrary, if the interest cost goes down the value of the securities goes up. The bank recently said it took a US$1.8 billion hit on the sale of some of those securities. This resulted in a fall in the bank’s stock price. And the bank couldn’t raise fresh capital from the market.

That prompted prominent venture capital firms to become cautious and they advised the companies they invested in to pull their business from Silicon Valley Bank. Which resulted in to a snowball effect with growing numbers of depositors queuing up to withdraw their deposits. On a single day 9th March alone customers pulled out $42 billion from Silicon Valley Bank, draining the lender of all of its liquid cash. Which is almost 25% of its entire deposit base. And no bank in the world would survive that kind of withdrawal on a single day when no fresh deposit coming up. This forced the regulators to shut the bank down on 10th March. The fall of SVB is despite having a strong asset base. What this fall means to its customers? For depositors with $250,000 or less in cash at SVB which is insured will have access to their entire deposits when the bank reopens for transaction. However, those depositors with anything above the FDIC limit of $250,000 may not get the rest of their money. These depositors will be given a “Receiver’s Certificate” by the FDIC for the uninsured amount of their deposits. This is what the privatization of all the PSU banks would finally mean in India. Today we may not be satisfied with the services of our PSU banks, but our deposits are safe. Safety is any day better than glorified service. FDIC has said that they would pay some amount from the uninsured deposits as the regulator plans to liquidate SVB’s assets. However, if the FDIC has to sell the assets at a significant loss, the depositors may not get any additional amount.

Now say, do you find any similarity between SVB and Adani group. SVB failed despite having a strong asset base. What was the reason for the failure of SVB? There are predominantly only two reasons. The bank failed simply because it couldn’t pay the depositors' withdrawal demand. And I have already said that no bank in the world would sustain such kind of panic demand if, on a single day, the depositors withdraw 25% of the bank’s entire deposit. It was a panic attack. The second reason was the lack of diversification in investment. Silicon Valley Bank invested a large amount of bank deposits in long-term U.S. treasuries and agency mortgage-backed securities. However, these bonds & securities started losing their value with the rise of federal interest rates. It was not in a position to raise liquid cash without making significant losses.

Many of us started arming our guns at the Hindenburg for not attacking SVB or for not sounding an alert. First of all, there was no shoddy deal by SVB to expose by Hindenburg. Banks buying treasury bonds equivalent to our RBI bonds couldn’t be a questionable investment. Secondly, a 500% increase in the federal rate was possibly not anticipated or predicted. Most importantly no bank would ever be able to deal with such kind of panic withdrawal unless the central bank comes into its rescue as the lender of last resort. However, the central bank can not rescue a private bank. That is possible only for public sector banks in India. But the moment all the PSU banks are privatised, RBI wouldn’t be able to come to their rescue. This is exactly the reason I am against the privatization of the PSU banks. Had there been a lender of last resort kind of arrangement this failure possibly could have been warded off. The government would have come forward to assure the investors that their deposits were safe. But it can not do so for a private bank. Though in 2008–09 when ICICI bank was facing a similar crisis MMS government stood rock solid to back it up by assuring the investors that their deposits were safe. And ICICI bank smoothly sailed through.

Coming back to the point of Adani. Adani group has not failed yet, though it share price has crashed which was astronomically high for no reason. However, personally has not suffered any loss so far as his investment is concerned. Adani’s equity holdings are on book price or face value not on premium. For example, the flagship Adani Enterprise stock price was around Rs.125/- three years back which inflated to Rs.4125/- within three years. It is his investors who suffered the loss because they bought equities at a premium. LIC invested around 30,000 crores in Adani equities. But most of these equities were not bought through IPO or FPO. So this amount has not gone to Adani company accounts. This means Adani Group as an organization has not benefited because of these investments. This money has gone to some individual pocket, possibly to those offshore shell companies owned by Adani family members who in turn invested part of it back into the Adani group by buying bonds. This has resulted in growth in Adani group’s debt volume. The ballooning of Adani stocks and the whole circle of these transactions are absolutely shoddy affairs that need to be investigated. And I have already written in many of my answers that Adani’s assets or equity value doesn’t justify his debt. Despite the astronomical price of his equities, his debt-to-equity value was 2.36. This means if the total equity value is Rs.100/- his debt value is Rs.236/-. Just note that this is equity value, not asset value. The actual asset value would be much much lower. Hindenburg raised some very very pertinent questions, which Adani could not answer. Nor he could go to the US court to challenge the Hindenburg report.

What your opinion about Federal Reserve & other Western central banks again pumping nearly unlimited amounts of dollars into the failing banking system, like they did between 2008-2012 & 2020-2022 when real inflation already very high?

We are facing a complex situation there in the US and some of the Western nations. They have a complex as well as a very difficult task in their hand. They can neither afford the failure of the banking system nor afford to let the inflation go on increasing. If the Federal Reserve and the Central banks don’t pump funds to the needy banks, more banks will collapse. And if they pump funds, that will lead to excess supply currency in the market which in turn fuels inflation.

However, inflation is a much smaller problem in comparison to the failure of the banking system. If the banking system fails the whole economy will fail. No government can afford that. Though in Western nations the Federal Reserve or the Central Banks are neither responsible nor accountable to play the savior role to the private banks. In case of bank failure, the Federal Deposit Insurance Corporation (FDIC) would cover only a part of the total deposit which is covered by insurance. The depositors will lose all those amounts which is not covered by insurance. The fall of Silicon Valley Bank despite having strong asset base has become a huge concern for all the nation.

Image source - Khan Academy

People need to know that an increase in the money supply is not the only reason for inflation. The additional supply of money need not increase inflation. Inflation happens mostly because of the demand-supply gap. Let me give an example. Suppose there is only 100 Kg rice available in the market and the buyers having a total of Rs.1000/- to buy ric.. So the price of rice will be Rs.10/- per Kg. Now suppose we increase the salary of the people and they have Rs2000/- to buy rice. But the supply of rice remains the same at 100 Kg. Withing increasing purchasing power buyers would like to buy the additional quantities, however, since the supply is limited they will be able to buy on 100 Ks. So the demand-supply intersection point will decide the price at Rs.20. This is an inflation situation of Rupee losing its value/purchasing power. Now suppose if the supply also increased to 200 Kg, the price would have remained constant at Rs.10/- only. So we can see an increase in money supply alone doesn’t create inflation. If you can address the demand - supply gap inflation situation can be addressed. This is related to the demand for essential commodities. This actually happens because of a shortage of supply corresponding to demand, not because of an increase in money supply. Higher demands for consumer goods and industrial products generally do not lead to inflation since the supply can be increased to calibrate with demand.

Over the last one year, the Federal rate of interest rate has been increased by around 500%, from 0.75% to 4.75%. This has put the commercial bank under the severe burden of paying higher interest on the deposit where demand for fresh credit has not increased rather higher interest rates draw more deposits to the bank. The federal rate was increased to pull back the additional currency volume from circulation. During COVID-19, the US printed some additional $ 5 trillion in currency. A major part of this volume got invested across the globe since the federal interest rate was low. But from September 2021 the federal rate started rising in an effort to quell the inflation. The problem of rapid increase in interest rates intensified in 2022 and 2023.

And deposits started pouring back into the US. The commercial banks started raking up huge deposits. SVB’s assets and deposits almost doubled in 2021. However, there were very few opportunities to lend out such huge deposits and the banks started reeling under the huge cost of interest payment. So, what SVB could not lend out, had to invest in ultra-safe U.S. Treasury securities. However, the game started here. The US Treasury has a typical way to balance it out the high-interest cost by cutting down the value of these bonds & securities as the interest cost goes up. On the contrary, if the interest cost goes down the value of the securities goes up. The bank recently said it took a US$1.8 billion hit on the sale of some of those securities. This resulted in a fall in the bank’s stock price. And the bank couldn’t raise fresh capital from the market.

An astonishing 94% of Silicon Valley Bank's deposits — including large cash holdings by tech startups — were uninsured by the FDIC. That prompted prominent venture capital firms to become cautious and they advised the companies they invested in to pull their business from Silicon Valley Bank. Which resulted in a snowball effect with growing numbers of depositors queuing up to withdraw their deposits. On a single day 9th March alone customers pulled out $42 billion from Silicon Valley Bank, draining the lender of all of its liquid cash. Which is almost 25% of its entire deposit base. And no bank in the world would survive that kind of withdrawal on a single day. This forced the regulators to shut the bank down on 10th March. The fall of SVB is despite having a strong asset base. In a way, the increase in the Federal Reserve rate is directly responsible for the fall of SVC. The only way to save the bank is to infuse additional capital to offset any extraordinary spike or skew in demand for withdrawal.

Economist Peter Schiff Warns of US Dollar Devaluation and 'Biggest Economic Disaster' in History

This is exactly the reason I say that major banks should be under the public sector. The Federal Reserve or the Central Banks only need to assure the depositors that their money is absolutely safe, nobody needs to panic. Which could have averted the fall of SVC. People must have observed that when SVC faced massive withdrawal demand, other US banks experienced a huge spurt in deposits. So in a way, there would be a balance in withdrawal and deposit. However, there could be a move to divert some of the investment into the secure market. But that would also essentially reduce currency volume in circulation. In India, commercial banks operate with a predefined reserve ratio determined by RBI to regulate the money supply in the market. Secondly, Banks can deposit surplus funds with RBI. I believe the current Indian banking system in India is much better than the banking system followed in the USA. However, there are areas in our banking system that need correction. But overall banks in the public sector are a much better and robust system. The US for the time being has to go through this turmoil of tug of war between increasing interest rates to pull back currency volume from the market as well as pumping money into the banking system. But things will settle down if the Federal Reserve gives a counter-guarantee that all the deposits with commercial banks are safe.