In 2006 millions of middle-class Indians saw those tired election promises of roti, kapda aur makaan turn into reality. It wasn’t thanks to the government. Consumers bootstrapped their living standards— with help from the friendly neighbourhood retail credit provider. In the first half of 2006-7, GDP grew at an unprecedented 8.9%—and two-thirds of that growth was driven by consumerism. Rupee salaries grew 13.8%, impressive coming on the back of 14.1% growth in 2005. This is the third year in a row that Indian salary hikes topped the world.
Credit card issuance jumped by 5 million to touch 25 million card holders this year. Card spends went up to Rs 16,390 crore—from Rs 12,960 crore in 2005, up 24.5%. Vehicle loans rose by 22.3%. Personal loans went up by 29.3%. Home loan disbursals increased by nearly 28% to an amazing Rs 20,679 crore. This was despite a relative correction in real estate prices and rising rates. If we couple the rise in real estate prices to home loan penetration, it’s not farfetched to claim that 2006 created more crorepatis than the past five decades combined. Real estate is the single largest asset for most of the middle class. But other assets like equity and gold also delivered. The Sensex and Nifty rose by 50% and 35% respectively and Indian investors embraced equity like never before with a mega Rs 20,083.58 crore investment in initial public offerings and Rs 37,653 crore in mutual funds. Gold rose 18%, while silver did even better (up 41%).
But there’s no silver lining without a cloud. Inflation also rose perceptibly after several years (see Upfront: Tax Burden). By December, the RBI had hiked rates and issued warnings about overheating. Let’s hope that P. Chidambaram and his mandarins find a way of controlling inflation in 2007 without putting a brake on growth.
A Bull Run and Two Blips
People love round numbers. The Sensex, which opened on 2 January at 9,423 points, crossed 10,000 on 6 February, and every investor celebrated—by buying more stocks. The Budget provided more impetus. By 11 May, the Sensex was 12,500-plus. The FIIs were consistently bullish. But global capital flees if there’s a twitch in global indicators. On 10 May, the US Federal Reserve raised dollar rates and that provoked a sell-off. By 14 June, the Sensex had dropped 31%.
A strong recovery followed. By 8 December, the Sensex was past 14,000. Then, the RBI tightened and the Thais imposed currency controls and sparked a “blood-baht”.
By 22 December, the Sensex was up 50% from January, Nifty up 35%, CNX mid-caps up 24% and the BSE small-caps up 10%. Mutual funds bought Rs 10,378 crore; the FIIs parked over Rs 37,837 crore.
In the primary market, 71 IPOs raised a massive Rs 20,083 crore. Next year, the know your customer (KYC) norms, inspired by the Roopalbehn scam, will be in place. Here’s hoping equity delivers again!
Managing Growing Assets
Yet another year when fund houses raised money from investors riding happily on the stock market boom. A total of 113 NFOs hit the markets in 2006—of these, 77 were open-ended and 36 closed-ended schemes collecting a whopping Rs 37,635 crore. Reliance Equity created history amassing a record Rs 5,790 crore, the largest Indian fund subscription. The old UTI Asset mamagement company found private AMCs breathing down its neck and threatening to displace it as the biggest Indian fund house. The biggest regulatory change came with a Sebi order in April. That forced fund houses to focus on closed-ended schemes over open-ended schemes—Sebi directed that NFO charges could only be amortised over five years for closed-ended schemes.
Return of the FD
The fixed deposit returned in April. Kotak Mahindra Bank pioneered with an offer of 8% on 290-day deposits. Now, most banks are offering 8% over 390-400 days. Ironically, higher and lower tenures have dropped by 1.25%. Strong credit growth has led to banks aggressively chasing deposits.
Close to 100 new life insurance plans were launched thanks to policy changes that came into effect from 1 July 2006. It rained Ulips (unitlinked insurance plans) — the investment-based selling and buying of Ulips changed with the policy, making it more akin to a pure insurance product. The minimum tenure of the Ulip plan was raised to five years, minimum sum assured to be five times the annual premium or half the tenure of the policy times the annual premium, whichever is higher. The doing away of sub-limit of Rs 10,000 on pension products to avail tax benefits encourages insurers to come up with pension plans.
Property prices have seen a huge surge this year across both the commercial and residential segments. Rising salaries have induced people to continue taking home loans despite rising interest rates. Individuals are now viewing real estate as an asset class for investing. Returns on real estate investments have beaten all other classes this year. On the commercial side, surprise, surprise, upmarket Khan Market in Delhi, is now the 24th most expensive retail location in the world according to “Main Streets Across the World 2006”, an annual report on global retail rents by Cushman & Wakefield, international property consultants. Khan Market at Rs 700 per sq ft is the most expensive retail location within India having seen a 75% annual rental growth. The year also saw many Tier-2 cities buzzing with frenzied real estate activity riding on the back of large SEZ project announcements and policy changes in land use.