India: The Transformative Impact of Government Regulation

In November, I traveled to Mumbai to participate in a Pacific Pension & Investment Institute roundtable.

On my 25-kilometer ride in from the airport, I caught a glimpse of the abject poverty, the crumbling infrastructure and the social hardship facing a staggering number of Indians. The sights were not necessarily unlike what I’ve seen in other cities, but with a population of more than 21 million, there was simply more of everything – good and bad – to see.

On my return to the airport four days later, while passing the same scenes, I had a more hopeful perspective – an enthusiasm for what might be possible in India and a renewed appreciation for the positive impact that government regulation can have on an economy and its people.

With real GDP growth averaging 7.4% over the last ten years, India’s economy was already on a positive trajectory but the government’s push toward digitization could make it one of the fastest growing economies in the world.

In 2009, the introduction of Aadhaar lit the digital match, creating the foundation for the “India Stack” (sometimes referred to as the largest open API in the world). Today, Aadhaar is the world’s largest and most sophisticated biometric ID system with approximately 1.2 billion enrolled, representing 99% of India’s population over the age of 18. Prime Minister Modi’s Jan Dhan financial inclusion program followed in August 2014, accelerating the set-up of bank accounts – there’s now about 290 million of them with more than US$10 billion deposited. While not devoid of controversy, these government-initiated programs, combined with the later introduction of eKYC (electronic Know Your Customer), e-Sign and Digital Locker initiatives, are fueling the rapid formalization of the Indian economy.

One fascinating part of this change is that India is now experiencing a flow of money into investment products.

India’s traditional savings culture is swiftly shifting to an investing ethos. Mutual funds have become the favored investment vehicles, evidenced by the fact that mutual fund industry AUM in India has more than doubled since 2014, with equity mutual funds registering record inflows on strong participation from retail investors. Overall, equity funds AUM more than tripled in 2017 and total mutual fund AUM is up more than 30% post-demonitization. Much of the credit for the move to investing goes to markets regulator SEBI and firms like Morningstar for creating awareness/education about such investment products, on top of recent amendments to the Prevention of Money Laundering Act (PMLA), requiring financial Institutions dealing with mutual funds to link customers’ Aadhaar numbers to their investment accounts.

Admittedly, my personal enthusiasm for what’s happening in India revolves around what is yet to come – a growing interest and participation in responsible investing. For more than 25 years, I have studied regional and global trends in responsible investing. Across Europe and Canada, in the United States, and most recently in Japan, the same socio-economic, regulatory, educational and retail investing trends we’re seeing emerge in India eventually led to a heightened awareness of sustainability issues and subsequently, increased interest in investing responsibly. I am hopeful (and confident) the same will happen in India in the years ahead.