Economic Survey 2024 raises concerns over rising trend of speculation in Indian stock market

The Economic Survey 2024 has raised concerns over the increasing trend of speculation in the Indian stock market, cautioning that overconfidence among investors could lead to unrealistic expectations of returns, misaligned with actual market conditions.

"Possibility of overconfidence leading to speculation for higher returns from the stock market is a matter of concern," the survey stated, underscoring the need for prudent investment practices amidst a surging market capitalisation. Currently, India's market capitalisation-to-GDP ratio ranks as the fifth largest globally, a testament to the booming stock market.

The Indian benchmark Nifty has surged nearly 13 percent in 2024 to date and over 24 percent in the past year, achieving multiple record highs. Most market experts anticipate this upward trend to continue.

The Economic Survey highlighted the significant rise in retail participation in the stock market, particularly in derivatives trading. "Derivatives trading holds the potential for outsized gains, catering to humans' gambling instincts and potentially augmenting income if profitable. These considerations are likely driving active retail participation in derivatives trading. However, globally, derivatives trading loses money for investors, for the most part," the survey noted.

The survey emphasised the importance of raising investor awareness and providing continuous financial education to caution against the low or negative expected returns from such trading activities.

It further warned that a significant stock market correction could disproportionately affect retail investors engaged in derivatives trading.

 "Investors’ behavioral response would be to feel ‘cheated’ by unseen greater forces. They may not return to capital markets for a long time. That is a loss to them and the economy," the survey observed, highlighting the long-term consequences of speculative losses on investor confidence and economic stability.

The survey also underscored the need for the financial sector to support the banking sector and bridge the capital gap essential for India's economic growth. "Therefore, the financial sector should expand at a pace that is in lockstep with economic growth. In particular, India can ill-afford the economy's over- financialisation at its current development stage," the survey recommended, stressing a balanced growth approach.

Amidst these concerns, there are speculations that the Union Budget tomorrow could announce changes in long-term capital gains tax or introduce uniformity in holding periods across various asset classes. Recently, Finance Minister Nirmala Sitharaman highlighted risks associated with unchecked retail participation in the futures and options (F&O) market. Some media reports also suggest that F&O income might be reclassified as 'speculative' rather than 'business income', which could impact investor behavior and taxation.

The Economic Survey 2024 calls for a cautious approach to stock market investments, particularly in speculative derivatives trading. With an emphasis on investor education and awareness, the survey aims to mitigate the risks posed by overconfidence and speculation, ensuring a more stable and supportive financial sector that aligns with India's economic growth trajectory.