Retail Investors' F&O Play For Quick Profits A Worry; Short-Termism Biggest Risk To Growth: CEA

Chief Economic Advisor V Anantha Nageswaran on Wednesday said he is "worried" over retail investors' play in risky Futures and Options segment in search of instant profits.

Speaking at a conference organised by capital markets regulator SEBI and NISM, Nageswaran said the biggest threat to sustainable capital formation and also sustainable economic growth is the 'short-termism' in attitudes that the country is afflicted with.

Bemoaning the "furore" caused every time, there is a discussion on allowing corporate groups to promote banks despite the need for capital in a growing economy, Nageswaran said India Inc needs to reflect on the state of corporate governance practices and analyse its own conduct.

"The biggest risk for sustained capital formation and sustained economic growth is... in our short-termism,' he said.

He added that it is 'puzzling' to see that a country otherwise blessed with a "deep spiritual heritage and wisdom" is actually interpreting mindfulness and living in the present in the wrong ways.

Nageswaran rued that even now, people are mentioning handsome growth in F&O volumes, despite Sebi's own studies suggesting that 90% of trades in the riskier segment leading to losses for investors.

"Our actions make me worry that we may be interpreting mindfulness and living in the present as being myopic," he said, making it clear that those two concepts stress on performing one's duty and obligations without thinking about the fruits of the actions.

He said there is a need to change the outlook from a behaviourial perspective to achieve goals like long-term capital formation and growth.

Nageswaran rued that there is an "adversarial" attitude among many stakeholders when it comes to regulators, wherein people overlook the fact a regulator's job is to have a long-term view of things and "providing counterbalance for instant gratification or myopia".

"The underline focus that the regulators have is to ensure that we stay stronger for longer rather than get caught up in the immediate euphoria of our growth rates, market valuations," he said.

Amid concerns that the activity in the F&O segment is fuelled by those seeking quick profits, he said the rising exposure of small investors in the segment "is a worry because we don't want to go through boom and bust cycles again and again".

Nageswaran said the economy is likely to grow 7% in FY25 as well, which will make it the third year in a row when the GDP has grown at over 7%.

Stating that capital formation and economic growth are interdependent, wherein one feeds into another, he said the only mantra for policymakers in such times is not to be conventional and described India's prudent response to the Covid crisis as a case in point.

However, sustaining high growth performance has been "elusive" for India, which has had short periods of high growth that are typically followed by a long period of balancesheet repair, dud loan cleaning for lenders, etc, he said, reminding that "we need to keep in mind that China grew around double digits for three decades".

"There is a need to ensure that we don't indulge in excess lending or excess borrowing in the current cycle as well", he said, adding that we need to make detailed plans with projections on growth, capital required, how it will come, how much as debt and how much as equity.

Banks also need to be adequately capitalised to fund the growth needs of the economy, and corporate ownership of banks will have to be allowed if the banks are to get the capital, he said.

"Why is it a taboo to even discuss corporate ownership of banks? The fact that a mere discussion of the idea of licensing of banks to corporate houses creates such a backlash or a furore is indeed a cause for reflection on the part of the corporates too," he said.

"It is also unfortunately a reflection on the overall state of corporate governance in the country," Nageswaran said.