How India Invests? Return of Capital? - Give me That! (Part 3 of 4)

This is the second of a four part essay. You can read the first part here and the second part here. In this series, I explore if states of India have investor personalities. And specifically, in this part, I look at the states who are over/under allocated with respect to equities given their income levels.

The first part of the essay was a lot of Gyaan - just to set up the context (and maybe as a bait for Sopranos fans). The second part was about states which exhibit investor personalities similar to high risk taking individuals. In this part, we look at states over-allocated to safe investments - term deposits and gold. We try to understand if there are idiosyncrasies and collective experiences that define such behavior.

Outliers Flipped?

Now let us move from the higher risk part of the investment spectrum to lower risk (term deposits) to defensive (Gold) investments and see how the same states stack up.

Return of Capital, give me that

Now, when you look at Average retail term deposits by state and then adjust it against state-wise income levels, it seems that the situation of outliers is slightly flipped. Rich Southern States don’t seem to be as under-allocated towards term deposits (adjusted for income) as they were for equities (except for Andhra Pradesh).?

Term Deposits? We don’t do that here

There are some states for whom Term Deposits and Equities seem to be perfect investment substitutes for each other - Rajasthan (RJ) and Gujarat (GJ). They are almost as over-allocated given their income levels towards equities as they are under-allocated towards term deposits

I will have one of everything

But this dynamic is not true for all the states. Convergent States, especially Uttar Pradesh (UP) and Madhya Pradesh (MP) are over-allocated, given their income levels, for both equities and term deposits. In my view, it might just be because we are measuring only financial savings here. And these two states in general might have a higher share of their wealth in financial savings (given their income level) than other states.?

We are the Goldbugs

Holdings in gold provide another reason for why Rich Southern States and some others (Chhattisgarh) seem to show such under-allocation towards equity investments (in case of Chhattisgarh all financial investments). Three of the five top states with the highest gold holdings per household are in the Rich Southern States cohort (Kerala, Tamil Nadu and Telangana). In contrast, average gold holdings of Convergent States (green bars in illustration 4), at INR 16K per household are nearly 50% lower than the national average

I have nothing to lose. Like literally

Jharkhand (JH), the state with lowest gold holdings per household, also stands out. It is also one of the Laggard States with an over-allocation, relative to its income levels, into term deposits and equities. Might a lack of savings in gold and land (given its poor arability) mean that a good share of it gets plowed back into financial savings?

We are buying land Tony, at least in Punjab

On the opposite end of the spectrum relative to Jharkhand, lie Punjab (PB) and Andhra Pradesh (AP). They seem to be under-indexed, relative to income, for all types of financial investments. While a consolidated account of landholdings across states remains un-measured, the size of agricultural landholdings might give a hint - about where else investments could go. Does agricultural land in Punjab, with an average holding being 3.5x the size of national average, provide an alternative channel to sequester investments? Especially if you consider its above average yield relative to the country and its history of agricultural excellence through centuries? Andhra Pradesh (AP) remains an enigma though. Its under-indexation, relative to income, persists - whether you look at direct equity holdings, equity MFs, term deposits, gold or agricultural land

The Upshot

All these insights can be distilled into two big stories.

States with higher than average GDP growth, but lower income per capita compared to the country might have a higher risk appetite. Either driven by a more optimistic view of the past, or because they came of age in an equity market with no major downturns and an unprecedented access to low cost broking

And

The inherent conservatism of Rich Southern and Northern States towards investing might come from their past experiences. Some of them remain wedded to assets and economic models that worked for them in the past (e.g. Punjab). Others (especially the Rich Southern States) might have grown rich before equity markets in India widened and deepened. Until around the mid 2000s, equity markets in India - for over a century- had been afflicted by poor corporate governance and insider trading. This might explain the instinct of those who got rich in that era to allocate more towards safer investments that offered a surety of return of capital (term deposits and gold)

Finally, a request.

I don't know how LinkedIn will evolve. But I suspect that deeper, original writing is more likely to get lost in the mass produced content from creators on this platform too.

I have a day job, which pays me good enough. And a work life balance that gives me time to reflect. My motivation to write is to become a better thinker. If you like these pieces, consider subscribing to my Substack here.