The Rich Getting Richer Is Creating A Sustained Divergence In India’s Economy

India can’t rely on wealthy individuals to drive growth and expect the overall economy to improve, Viral Acharya, former deputy governor of the Reserve Bank of India (RBI), the country’s central bank, had said at a conference in September that I had the opportunity to attend.

“We can’t be pumping our growth through the rich and expect that the economy as a whole will do better,” he had said, adding that when the rich keep getting wealthier and wealthier, they have a savings problem.

Acharya, who is the CV Starr Professor of Economics in the Department of Finance at New York University’s Stern School of Business (NYU-Stern), had pointed out that as the rich get richer, they look for financial assets to invest in.

In the case of India, the rich can’t invest their money outside of their country very easily. “So, it has to chase the limited financial assets in the country and a lot of the prices in that space have gone up but it doesn't boost India's consumption,” Acharya had said.

The professor also touched upon the fact that rural consumption and investments had weakened after the Covid-19 pandemic.

Acharya was likely referring to the post pandemic spending surge that had already started to show early signs of slow down. The signs became more stark once the results of consumer product companies started to be released.

The latest HSBC Global Entrepreneurship Wealth Report 2024 reminded me of Acharya’s words.

Good News And Bad

The good news is that Indian entrepreneurs are generating wealth, including from stock sales in a booming stock market or from exits to venture capital investors. They have also generated wealth from businesses which have been lifted by the sheer consumer-led growth as well as public spending we saw accelerate in recent years.

But there’s a flip side.

Rich Indian entrepreneurs are using their wealth predominantly for investment in stocks, bonds and real estate, the HSBC's Wealth Report 2024 said. Their approach to wealth management is quite different from other markets, the report goes on to illustrate.

According to the report 82% of Indian entrepreneurs — those with at least $2 million worth of investable assets — prefer to invest in the above-mentioned asset classes, which is the highest percentage amongst business owners in ten international markets (at 51%).

Investment in other businesses (at 41%) and precious metals and stones (25%) are the other investment avenues for the wealthy Indian entrepreneurs, the report suggests.

The results, HSBC said, are based on a sample of 1,798 high-net worth business owners, with at least $2 million worth of investable assets, who chose to take part in the survey.

Here are some more insights on the spending spree India’s wealthy are on as compared to other countries.

Six out of 10 (61%) Indian wealthy business owners allocate personal wealth to real estate for their own use compared to one in two globally (51%). They are also more likely to spend money on luxury goods (56%), compared to a global average of 40% and luxury experiences (44%), compared to a global average of 35%.

While the Indian market remains an attractive place to do business for the nation’s entrepreneurs with 75% of them operating domestically, many of them are looking to move abroad. Six out of ten (61%) are considering a personal move in the next 12 months, with Singapore, UAE and the US the most popular destinations.

Two in three (64%) are considering moving personal wealth in the next 12 months, with Singapore and UAE the most popular destinations.

Most of these individuals said their aim to grow their wealth was to improve their personal and family health and to ensure financial freedom. Enjoying a luxury lifestyle is cited by 44%, compared to a global average of 32%. However, they also have a strong sense of duty and nine out of ten (92%) agree that they take action to make a positive impact on society.

Nearly six out of ten (58%) say they are not currently thinking about or planning to exit their business, higher than the global average of 49%, and that figure increases to 72% for first generation entrepreneurs. More than four in ten (44%) are serial entrepreneurs, the second highest percentage in any of the markets surveyed.

A Sustained Divergence In The Economy

While the report is not a sweeping study of all wealth created and where it flowed, it does surely reinforce the point that there is a sustained divergence in the economy.

Since most wealth continues to go into stocks and bonds or back into them, it is keeping markets and domestic buying strong as is quite evident from the market movements in the last two months.

It also means that there is a mismatch between supply and good quality investment opportunities because they are mostly highly priced.

On the other hand, quarterly results of most consumer product companies are reflecting a stagnation of sorts in consumption if not slowdown.

This reinforces the fact that the wealth created is not directly flowing to the people who could actually spend it and thus drive up consumption and economic growth, something I have discussed in the past as well.

Real estate of course is seeing considerable investments, particularly in higher priced properties. This obviously has a trickle down effect into the construction industry and the over 71 million people who work in it, which is important because construction is the largest employer in India.

This also accentuates another mismatch, that all those who are trying to buy homes to live in are not able to do so this time around as well. We have already seen a slowdown in affordable housing because people are unable to put down the money for loans.

Interestingly, like we mentioned earlier, more than half of the surveyed individuals said they were looking to move to other countries and move their wealth in the next 12 months.

Their biggest worries were corruption, inflation and taxation. In that perhaps, whether rich or not rich, there is unanimity in thought.