Indian financial services in numbers

Before I get to the meat of this piece, some nostalgia around Cricket, given it is India playing Pakistan in the Asia Cup match today.

It is 2011, and the Cricket World Cup has come to India after a long time. Every conversation in the trains, buses, chai shops and hotels at the time was all about cricket. The even more prominent question was if this was the year we ended the wait of 28 years to win the World Cup again. After all, it was a perfect opportunity to send off one of the best the game had seen - Sachin Ramesh Tendulkar, who was undoubtedly retiring after the tournament ended.

Here is me, along with my collegemates, watching the group stage match. This was, of course, India playing Pakistan - for that one day, the alleyways and canteens of the college were deserted. Everyone was glued to the TV. Palpable tension everywhere.

Of course, as history would have it, India won the Cricket World Cup that year, and who can forget the iconic lines by Ravi Shastri,

“Dhoni finishes off in style. A magnificent strike into the crowd! India lift the World Cup after 28 years!”

I cannot comprehend how 12 years have flown by since that moment, And the World Cup is coming home again in October of this year. Could this be our year again? Time will tell. But there is again palpable tension already.

2011 also coincided with when I was introduced to capital markets and the fascinating world of Finance. How ironic that an Engineering college is where I would first start learning the basics of finance. At the time, I had friends who were trading and investing. Even though small sums of money were at stake, what they did seemed fascinating. Every day, we discussed how companies worked, how they operated, and the people leading these companies. I eventually started helping my friends with research to pick businesses where we could buy a handful of shares—it seemed exciting compared to learning programming and information systems.

By 2014, it all made sense. Despite an engineering degree, I ended up joining a hedge fund right out of college. I clearly remember how the first thing I did at my first job was to revise and check the market size for all the financial sectors in India and compare it to other countries, specifically the US, China, Japan and so on. I wanted to know the numbers inside out.

Fast forward to today - I still work in financial services, and at Zerodha, I have a front-row seat to all that happens in the capital markets industry. The only thing that has changed since 2011 is perhaps how much more there is to learn.

I am reminiscing about the past decade because last month, while at a speaking event, I failed to memorise a few data points on the economy. And it may be time to redo the market size exercise again. I am writing down my thoughts on the economy to document everything I find out. In 2014, the focus was just on the economic side - purely numbers. But I am better placed today to add context and nuances to those numbers. So, here we go.

Disclaimer - This blog might not be exhaustive, and I could certainly be wrong on several counts.

Capital Formation, what’s that?

Even though times have changed over the past decade, not much has changed in how we measure an economy. Gross Capital Formation – the total quantum of new capital investments in the economy – is at 31 percent of GDP in FY23. US is around 20-25% and China is at around 35-40% (both in GDP terms).

Check out the excerpt from the budget speech by the Finance Minister of India earlier this year,

Capital Investment as driver of growth and jobs

44. Capital investment outlay is being increased steeply for the third year in a row by 33 per cent to Rs 10 lakh crore, which would be 3.3 per cent of GDP. This will be almost three times the outlay in 2019-20.

45. This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd-in private investments, and provide a cushion against global headwinds.

Effective Capital Expenditure

46. The direct capital investment by the Centre is complemented by the provision made for the creation of capital assets through Grants-in-Aid to States. The ‘Effective Capital Expenditure’ of the Centre is budgeted at Rs 13.7 lakh crore, which will be 4.5 per cent of GDP.

Source

And if one were to Google the phrase economic development, every news article and blog would talk about building more stuff. This is how I figured that the jargon for building new stuff is Capital Formation. Capital formation, in simple terms, is using resources like money and time to develop physical and financial assets. For example, think of roads, manufacturing facilities, equipment, vehicles and financial assets like stocks, bonds, and other securities. The expenditure used towards capital formation is called capital expenditure - which most economists and other financial markets commentators refer to. We will focus on financial capital formation throughout this piece, and I will refer to it as capital formation.

To grasp how financial capital formation is helpful for the modern economy, think of a village in any part of India - for the village to grow and develop, we need schools, hospitals, and commercial centres. All these will help the quality of life and provide avenues for livelihoods. And as more people educate themselves, they do better than the others who dont, and the cycle continues. This is all great. But since the village is inherently not prosperous and does not have money to spend, we need help in the form of capital, say debt, which can then be used to build all the critical infrastructure. But there is another option; maybe the local entrepreneurs could raise equity capital - money in return for a share of a company’s cash flow. Equity capital can then be used for business operations, which could create jobs and economic value for the village. In this example - Equity and debt represent financial capital formation. Even though simplified, this applies to a country perfectly. And there is nothing more to this fancy word of capital formation.

In a developing country like ours, one of the most critical aspects of the economy is for governments and financial institutions to ideally enable businesses and industries to expand meaningfully, innovate, be sustainable and improve productivity. And the enabler for all of this is available capital. Consequently, as businesses grow, there are more jobs, technological advancement, and hopefully less dependence on external supply chains. One thing feeds the other, and we eventually have a thriving country with lesser income inequality among the population, better healthcare, better education, a better way of living and, indeed, a better view of the challenges ahead.

Can we today look at growth in isolation, though? Certainly not. Even though we think of capital as the silver bullet to development, there is more to it. Our default thought process of equating more capital to higher and unrestricted growth needs to be tweaked a little. While we think of growth, we must also focus on challenges that are prevalent today.

Think of climate change, mass migration to cities and under-development of rural and semi-urban regions of the country. If you were to ask seasoned economists and experts, they would share a few more challenges hidden underneath the headlines we all come across.

Now that we have context into why capital formation is important and why we need to relook at the challenges being solved through capital, we can go into the market sizes of institutions and vehicles supporting it.

Benchmarking the Indian financial services market

1. GDP and macro data

Let’s start with the GDP and go from there. India has grown from a GDP of Rs 5.3 lakh crore in 1991 to Rs 273 lakh crore in 2023. Between 2014 and 2023, GDP grew from Rs 113 lakh crore to Rs 273 lakh crore, an addition of Rs 159 lakh crore.

But the GDP per capita difference between India and other countries sticks out immediately when we look at GDP data for the top 10 largest countries. And while we map out all the other financial sectors, the context of our GDP per capita will be helpful.

60% of India’s GDP is driven by local consumption of goods and services. Here is an excellent snapshot of the GDP breakup from a report by Blume Ventures,

Source

We can all try to predict what will happen with consumption and other sectors in India, and all of us will agree that there is growth waiting to happen - but the question is when. With middle-income groups seeing an average growth of 5-7%, we will see more consumers in the market today, better employability, and resilient spending powers, which bodes well for us. But there is still a long way to go. Check out the income groups below,

Source

While looking for a few examples of recent surveys on the economy, I found this one by Wasatch. Here is an excerpt,

Unlike much of the world, India’s economy is still strong

The management teams we spoke with— even teams that have historically been more conservative—were positive about the economic outlook for the country. Consumers, hotel operators and cab drivers were equally optimistic. Capital spending and housing appear to be in an upcycle, and banks are reporting non-performing loans near all-time lows. Massive construction projects within cities and capital-spending plans among businesses point to a coordinated effort to spring India’s economy forward. We saw highways, overpasses, bridges and infrastructure being built everywhere. The sense of optimism and excitement among businesses and consumers was quite different from what we read and hear about in many other parts of the world, where recessions have arrived or recession fears are mounting. Economic forecasts confirm our views on the ground, with the International Monetary Fund forecasting real GDP growth of around 6% for India in 2023, one of the highest rates in emerging and developed markets.

Source

But there are challenges and things we can improve upon.

• While there are other structural issues with GDP, one thing that sticks out is how dismal India’s female labor participation is. Nithin explained this in the post here. The post summarises the cause for the state of how low the participation is today. And I think this is maybe the next big project for all of us to focus on. There can be several solutions to this problem, but the fact that we are all aware of the problem itself I think, will go a long way.

Here is the female labor force participation trend for India - 25%. While some of the developed nations are at 50%.

• Since we are speaking of increasing GDP and income growth rates, we must also quote the numbers that dont look too great. Let’s start with income tax collections in India. Unless you have not spent time listening to economic commentary - it would be no surprise that very few Indians pay any tax. The number of ITRs filed is insignificant despite an uptick; what matters is the number of total taxpayers. That is at a dismal 1.9% of the population. The answer to this problem is maybe a utopian world.

Source

• Let us also check the GDP contribution from different sectors and the employment % of those specific sectors. This will give us a fair idea of what sectors of our economy are contributing to the economy and if a commensurate number of jobs are created in that sector. Data shows that 50% of India’s workforce today is concentrated in Agriculture, but it contributes just 17-20% of the GDP. In contrast, Services with 30% of the workforce constitute 50% of GDP. This is quite a problem, and has troubled policymakers for a couple of decades at least.

The first image represents the % of the workforce involved across sectors, and the second image represents the GDP contribution of sectors to Indian GDP.

What we see in the statistics is anything but comforting. Before we even touch upon why, agriculture, which forms a large part of our workforce only contributes to a quarter of our economy, it must be stated that the age-old one size fits all solutions won’t cut it anymore. While it is easier to talk about how we need investments and infrastructure for the agri sector to do better, our focus should be on small and marginal farmers and how we can help them do better.

The questions we need to solve are right in front of us. However, the solutions may not be as obvious.

I personally believe that a large chunk of our efforts must be first spent on evaluating current systems and identifying the pain points. And these pain points must not only be broad themes but also spell out the ground-level realities. If one were to do some research on the hurdles for agriculture, the answers would always be some versions of the following - poverty, access to credit, markets, equipment and other easier inferences. But from all that I have learned over the past few months and while doing some research for this blog, there are granular issues that culminate into those broad issues we have heard of.

A better start would be to start asking tough questions like - how can we build awareness about soil health deterioration due to excessive use of fertilisers, what are some of the alternatives to fertilisers and pesticides in use, how can we get more farmers to adopt regenerative farming practices, what more needs to be done to help farmers who are willing to shift to better agricultural practices and how can we help in this transitional period, how can we help farmers adapt to risks from climate change. And these problem statements are just scratching the surface. And a lot of the answers to these questions also will be different for each region we consider and must be adapted for local circumstances. Sounds quite simple to write about, but this in itself will require a massive mobilisation of resources to identify, document and analyse the current state of challenges.

Actions, not policy recommendations, will be the difference as we go further into this decade. Over the next few years, if we can improve livelihoods for the current workforce engaged in agriculture, it will be a game-changer. We would also encourage more Indians to consider agriculture as a viable means for an occupation and in turn, avoid mass migration to cities in the hunt for unskilled jobs. And this will add so much more value to the economy.

You must be wondering why innovation and technology has not found a mention in the list of solutions, well that is because of how overrated it is. Better tools, machinery, and technology can only be short-term steroids that may hide the symptoms and at some point will make no marginal difference to agricultural outputs. Why so? Well, if we degrade the soil beyond a point, irrespective of how you sow, reap and irrigate the lands, it will be of no help. There are several experts out there on this topic, and I feel they would be better placed to suggest better ideas. But I feel this is a good starting point for anyone starting to think of this sector.

And sure, once we solve some of the simpler impediments, we can then pay attention to building improved market access for farmers, financial and social support focused on to rural communities through low-interest rate debt, and also make it easier to start and run an agri-business. And given how food security is a critical challenge for India’s long-term economic development. Now is the time to take stock of what has gone wrong and fix it.

I intend to end this section on an optimistic note, This talk by Mr Maran is quite nice. This is a must-listen for anyone curious about Indian markets and our economy in general. In a nutshell, Mr. Maran points out everything going right for us in the economy.

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2. Government spending

Government spending helps stimulate demand for services and products, improves the distribution of social programs and services, and increases infrastructure development, among other benefits. Again, going back to capital formation. Indian government contributes 15% of GDP towards spending.

Benchmark this to the US and China, at 45% and 15%, respectively.

While the government must balance several sectors’ capital requirements, we must look at some sectors more closely. Namely education and healthcare. While these sectors do get allocation, there is probably more that needs to be done.

The Covid pandemic made it clear how much room there is for improvement in our public healthcare systems. We will end this decade with our population aged 60+ hovering around 190 million, which will more than double by 2050. And while some developed countries have taken 80-100 years with a doubling of population aged 60+, India will take just 20-25 years. A large section of our population also struggles to attain education for several reasons. And how can we leave out the risks posed by climate change and disruption of livelihoods?

And while we match in percentage terms the spending with the US, the scale of spending is miles apart. With the population we have, government spending, specifically directed towards pain points that are long-term, is the need of the hour.

But increasing government spending comes with its own set of challenges. This is why any increase in government spending needs to be well thought out. Increased spending without commensurate revenue can lead to increased deficits, creating upward pressure on interest rates and crowding out private borrowing. There can be misallocation of resources leading to inflation, like what we saw in the US for the past few years.

But with a balanced approach and gradual increase in government spending, we can create better infrastructure and social programs and strengthen the fabric of our economic industry with as few shocks as possible.

3. Debt market

For the Government to spend towards capital expenditure, there are a few avenues for collecting revenue or funds. Firstly, the Direct and indirect taxes. Secondly, the debt market, where governments can sell bonds to raise funds. Apart from just the government, even corporations can sell bonds to raise capital for expenditure.

This is why debt markets form an essential part of a country’s economy. A mature and deep debt market means more accessible capital and lower interest costs, which will help us grow further by building better infrastructure and market linkages.

Here is what the global debt market looks like. The US again leads the way with 31 trillion dollars of the debt market. India is at 1.3 trillion dollars.

Debt market snapshot across countries

4. Banking

There are several reasons why banks are essential for an economy - financial inclusion, credit availability, and savings mobilization are some of the notable reasons.

• The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural cooperative banks, and cooperative credit institutions.

• In 2001, the total outstanding loans of Indian banks stood at ₹5.1 trillion, or 23.9% of the country’s GDP. By September 2022, the figure had grown to ₹130.4 trillion, or 50.3% of GDP.

• Meanwhile, the total bank deposits have jumped from ₹9.6 trillion, or 45% of GDP, as of March 2001, to ₹175.4 trillion, or 67.6% of the GDP.

• Post the NPA crisis over the past decade, robust recapitalisation of PSU banks, the introduction of the bankruptcy code, and RBI’s regulatory oversight have helped banks become resilient again across the board. For the full financial year 2022-23, public sector banks made profits of over Rs 1 lakh crore.

While the growth appears to be sharp, the interesting thing is that the size of Indian banking has stagnated for over a decade. The lending of banks has remained around 50-53% of the GDP since March 2009 (with 2020-21 being an exception due to COVID-19), and deposits have remained between 67-70% of GDP.

In the words of Mr KV Kamath,

How do you see the state of Indian banking today?

As the numbers reveal, the banks are in a very healthy state in terms of the book and the capital base. Growth rates will mimic the GDP growth, with about 20% higher numbers, so about 10-12% will be part of the course. Deposit growth will be fairly adequate to meet credit growth. I think double-digit growth is good growth. Here are a few more graphs/data on the Indian banking size. As you can see in the table representing banking assets and countries with higher assets - India is a fraction of some of the leading countries. Higher bank assets ideally should translate to financial inclusion, better access to credit, better cost of credit, better capital formation, and better overall growth of incomes, but we will need the policy to route all the banking penetration to the hinterlands in India. Over the next 5-10 years, India needs to scale up its penetration of banking and also increase the credit facilities available for individuals and businesses.

But on the flip side, you can see in the table representing banking assets and countries with higher banking assets - India is a fraction of some of the leading countries. Over the next 5-10 years, India needs to scale up its penetration of banking and also improve the credit underwriting process. A large section of individuals, entrepreneurs and businesses (MSMEs) in India are left out of the credit system for lack of data and precedence. And this needs fixing.

From my limited experience, I have noticed how enterprising rural India is, and there are no VCs to back these entrepreneurs. India banks must step in here. We need a push from policymakers to help enable this small change. Not only will this mean supporting some of the local entrepreneurs but will also mean a thriving local economy where these businesses get built. This also helps us derisk the concentration of businesses in metro cities in the long run.

Whichever way you see it, you will conclude that the roles of banks are only going to get more prominent in India. And I hope that we move on from traditional banking habits and usher in banking practices that reflect the true nature of our economy today.

Here is where India ranks with banking assets,

5. Insurance

There is a long way to go for India’s Insurance industry - the current penetration of insurance is around 4% as per the Economic Survey 2022-2023 (the significant drop from 5% around 2010 is an aftereffect of the market crash of 2008 and regulations around ULIPs

Here is the depth of the Indian insurance market,

The penetration of the Indian insurance industry is less than 5% of the GDP. IRDAI data shows that India’s insurance penetration was 4.2% of the GDP in 2021-22. In terms of penetration, India is far behind the global average of 7% of the GDP. In terms of penetration, India is ranked 20 in FY 2021-22. Countries like Taiwan, South Africa, the USA and the UK report higher penetration of 14.8%, 12.2%, 11.7% and 11.1% respectively.

Source

One of the issues with deepening the insurance market in India is the education and awareness around it. A large chunk of India’s population is one health or life event away from considerable financial and social health damage. The insurance industry can play a role in bringing more Indians to plan for the future and safeguard their financial well-being.

Here is my colleague Bhuvan explaining the role of Insurance in a no-frills financial planning post

Insurance companies also participate directly in the capital formation and the economy. Am sure you have all heard of investments by LIC in equities for example. Insurance companies with all the float (premiums collected), will need to find investment opportunities to make up for the liabilities they are bound to have. Hence a higher penetration of insurance would mean more capital coming towards capital markets to support some of the businesses that can not only impact jobs but also create more opportunities for economic prosperity. And here as well, there must be some pressure on the fund managers within the insurance companies to look at investment opportunities keeping in mind the context of the challenges we are facing today.

A small snapshot of the entire Indian insurance industry -

There is a case to be made for higher insurance penetration in India. But again, the lack of avenues to get educated on the right insurance policy to purchase makes it challenging to understand if a higher market penetration would translate into benefits for retail clients. The following 10 years will be great to see if we can grow the insurance market and if there is potential for Indian markets to utilize digital channels or if India will assert itself as a market where partner and offline networks will be essential and inseparable from insurance purchase decisions.

6. Stock markets

Over the past few years, the stock market has been in the news for adding several new retail participants. Today around 4% of India’s population participates in the equity markets. This number is of course significantly higher in other developed countries like China and the US. In a span of four years, number of demat accounts in India has grown 2.5 times from 4.1 crore in 2019-20 to 10 crore in 2022-23. Record numbers of SIPs are being registered. Monthly flow into the mutual fund industry has reached all-time high of ₹15,245 crore in July 2023. AUM of the Indian mutual fund industry has increased more than four-fold from ten lakh crore in May 2014 to a significant ₹46.37 lakh crores in July 2023.

Unsurprisingly, for decades Indian households have been risk-averse and continue to be so. There was more demand for bank fixed deposits and gold perhaps than for ownership of business. But with a new generation of wealth earners coming through, who are probably not privy to the difficult times of the past, we see behaviour shifting. Interesting times ahead.

Here are a few illustrations of how retail participation in the equity markets has trended.

Retain investor participation has obviously inched up.

Yearwise breakup of increase in retail investors.

Retail trading activity across equity/cash market and derivatives.

Mutual Fund scheme and AUM.

India’s market capitalization is at 300 lakh crore - way back in September 2003, it was just Rs 10 lakh crore.

Fintech consumer markets

Given I also spend a lot of time looking at the fintech market specifically, I wanted to share a bit about the Fintech market size given all the frenzy. While some of these numbers are estimates at best, it is still worth noting the scale that is at play.

• The Indian FinTech industry’s market size was $ 50 Bn in 2021, estimated at ~$ 150 Bn by 2025. India has around 7,500 fintech startups. From 2014 to mid-2022, the sector received more than $30 billion in funding. India’s digital lending market was worth $ 270 bn in 2022 and is expected to reach $ 350 bn by 2023.

• India is the 2nd largest Insurtech market in Asia-Pacific and is expected to grow by ~15X to reach $ 88.4 Bn by 2030; India is poised to emerge as one of the fastest-growing insurance markets in the world

• The Indian WealthTech market is expected to grow to $ 237 Bn by 2030 on the back of a growing base of retail investors

A lot of the credit perhaps goes to - drumroll, India Stack,

The rapid growth of fintech can also be attributed to favourable macroeconomic and demographic factors, including a rising middle class with higher disposable incomes to buy, borrow, save and invest more; increasing mobile access and digital adoption; abundant financial services and technology talent in the country; availability of equity and debt capital; and above all, government initiatives and regulatory efforts to create a conducive environment.

Here are a couple of subcategories I wanted to list out in terms of market sizes,

Payments data

• Volume of UPI transactions increased 200x from January 2017 (4.5 Mn) to January 2023 (10 Bn), and the Value increased 600x during the same period
• Daily transactions on the UPI platform can touch 1 Bn by 2025
• Digital Payments increased by 76% in transactions and 91% in value (2022)
• A pan-India digital payments survey (covering 90,000 respondents) revealed that 42% of respondents have used digital payments

Capital markets

Here is an excerpt from a blog by Nithin, CEO and Founder, Zerodha, the blog also explains the revenue pool at play for brokers, and that has not changed much since 2021 and is relevant even today.

Size of Indian capital markets – Retail

As of Jan 2021, CDSL has 2.89 crores, and NSDL has 2.08 crores demat accounts. That is a total of around five crore non-unique demat accounts. For example, I personally have over a dozen demat accounts opened in the last 20 years; most of them are now inactive.

A better way to track the size of the market is by looking at the NSE’s active client data. As of Jan 2021, according to NSE, around 1.6 crores or 16 million customers had traded once a year last year (last 12 months). This again is not a unique count, so if a customer had traded with two brokers, it would show up twice. By the way, this number has almost doubled from two years ago thanks to markets performing well in this period.

Zerodha today is the largest retail brokerage in India by all measures of trading activity. Extrapolating our active client data, we believe that the current size of retail in India (unique customers) is:

Yearly active: 1.2 crores to 1.3 crores

Monthly active: 70lks to 80lks

Daily active: 30lks to 40lks

What are some of the takeaways

• The next wave of growth in the Indian economy might not be just from AI or Superconductors but from improving the existing agricultural ecosystems that can add several magnitudes of value to GDP.

• Female labour participation rates have steadily declined — from 30% in 2000 to roughly 25% in 2023. Less than 7% of the urban women population has independent financial income. We must focus on improving this over the next few years to walk the talk with holistic economic development.

• The GDP per capita is also nuanced. Even though we see the $2000 per capita GDP on average - if we remove the top 30-40 million of our population based on income, the GDP per capita dips to $700.

• India’s GDP is growing at 5-6% annually. Compare it with the United States, which has 2% annual growth, and China, which has 5-6% growth. And here lies the difference. Even though the growth rate for the US is 2%, the addition to GDP annually is around 0.5 billion, whereas India is adding only 0.2 billion every year. And China is adding around 1 billion in GDP gross value.

• Global debt markets are three times bigger than global equity markets.

• Banks can play a part in localizing our economy by making capital available to entrepreneurs - setting precedence for the next few decades.

• Even though India is 5th largest economy in the world, the financial industry size is nowhere close to some of the other countries. As we move higher up the table, we must focus on capital formation and how various financial sectors can add value holistically. And maybe this is another opportunity for the future.

• While the growth rate compared to lower base rates seems great, the next few years need significantly improved efforts to reach the hinterlands with financial services and focus on overall growth rather than the concentrated growth we see today. The key to avoiding future conflicts will be ensuring we enable prosperity to a larger section of our population quickly.

• The VC industry and risk capital have a role to play. And India is at an inflexion point where it can use as many risk-takers in terms of capital as we can gather. The VC industry must look at boring sectors for investment and stop the fascination with Sand Hill Road. There are more significant problems to solve for. I explained this in my previous blog.

While this blog is probably more of a factsheet than anything else, I think it added lots of context in terms of financial services in India and how we stack up against other countries. Hope this is useful for you too.

Do share any thoughts and comments. And if any of the numbers are wrong, do let me know on LinkedIn or Twitter.