Nonetheless, most Indians have not been a part of this journey. Currently, there are around 4.5 crore demat accounts — with many households having multiple demat accounts — in India while the number of middle-class households in India is in the range of 10-15 crores, with this category growing at a fast pace.
The Covid-19 pandemic-related lockdowns and the simultaneous bull market did increase the interest in equities markets and more than 7 million, probably 10 million, demat and broking accounts were opened from April 2020 to present. These first-time investors are popularly termed as “Robinhood” traders after the US broking platform offering zero broking charges. These first-timers seem to be attracted by the easy and nearly-free fintech trading platforms and the easy money being made in the bull market in the short-term. It is easy to imagine that once the bull market is over these traders will be leaving the markets. Is there a way to retain these traders, convert them to longer-term investors allocating significant capital to the markets and also attract a large number of new ones?
Yes, the Government can “nudge” and make this happen by designing a scheme targeted to achieve this goal.
We think the need of the hour — in fact, month, year, and even decade — could be the Pradhan Mantri Atma Nirbhar Nagrik Yojana (PMANNY). The scheme is targeted to develop financial independence for Indian citizens. It could be under section 80C, like PPF, ELSS and SSY etc. or it could be given a separate allocation.
However, the key focus should be to direct first timers, the Robinhood traders, to the equity markets to build wealth over the long-term.
PMANNY would allow for a single designated bank account to be opened. The annual limit of Rs 1.5 lakh of section 80C would be available under the scheme. It would be even better if the Rs 1.5 lakh limit is increased annually based on the Cost of Inflation Index, published by the Income Tax department under section 48. This could result in accelerated savings rates and much larger corpuses to be achieved in shorter time periods. A separate section, other than 80C, enabling PMANNY to not compete with ELSS or other similar schemes would make it even more fruitful.
The investor can link any number of demat and trading accounts with different brokers to this designated PMANNY bank account. All investments made in this account would get a deduction as per section 80C. Further, from this account investments can be made only in the stock markets; this could include Indian stock markets, as well as global stock markets.
All dividends and gains from these investments would be tax-free. However, the lock-in period of withdrawal from this account should be restricted for the first 7 years. After 7 years, withdrawals in any given year, can be restricted to not more than 10% of the total corpus at that point of time. Of course, certain emergency situations can allow some withdrawal or liquidity under certain specified situations. Tax free withdrawals can be made after 20 years of completion of the scheme or achieving 60 years of age, whichever is earlier. Of course, these are suggested details, and these can be refined further to make it easier to implement for the investors, the banks, government officials and others involved in the implementation ecosystem.
Let’s explore some estimates of benefits from this scheme for an investor. Suppose an investor invests the full Rs 1.5 lakhs in this account, starting at the age of 25. With an investment return of 12% CAGR, in 19 years, by the age of 44, she would have achieved a corpus of Rs 1 crore and by the age of 60, will be more than Rs 7 crore.
Even an Rs 50,000 investment annually, starting at age 25, could help an investor reach Rs 1 crore by age 53 and more than Rs 2 crores by age 60.
The restrictions on short-term withdrawals will enforce a long-term oriented investment focus, discouraging the typical Robinhood day-trading mentality. Depending on the ease of implementation of the scheme, this could create an additional pool of risk-capital of $1 trillion or more, focused on the capital markets, over the next decade or so driving growth in the Indian economy.