The mantra that you can hear in every wealth management office in Mumbai, Bengaluru or Gurugram these days is that money used to lie like a dog under your bed and now it’s running towards returns in the stock market. Borrowers are being trained to become investors; insurance agents are selling systematic investment plans rather than endowment plans and a new breed of newly created crorepatis are investing windfalls in the market. In India, finance has become the most valuable industry as more than 25% of the nation's 500 top companies listed on the National Stock Exchange are financial firms. This reflects the level of economic productivity and who is generating it and it's becoming more important than ever to pay attention to that.

The figures behind the change are truly astounding. The equity investments have contributed about ₹60 lakh crore to the household wealth since April 2020, estimates the National Stock Exchange. Even as the momentum has not slowed down by any means in the run-up to the festive season, the amount of money invested in systematic investment plans in August rose to a new high of ₹32,297 crore, compared with ₹31,961 crore in the previous month of July, according to fresh data from the Association of Mutual Funds in India (AMFI). Equity mutual fund inflows surged 19 per cent month-on-month to nearly ₹29,700 crore, of which inflows in small-cap funds were nearly ₹8,000 crore, followed closely by inflows in equity mid-cap and flexi-cap funds. It is not just a rally that pushed this up, it is a monthly habit which millions of Indian households are now following.

Peel back the gloss off the headline figures, however, and the truth is revealed. The Securities and Exchange Board of India (SEBI) itself conducted a survey on investors and found that only 9.5 per cent of the country's population of around 34 crore actively invest in securities, meaning that more than 30 crore are completely out of the formal capital markets. The income disparity is significant: almost 25 per cent of households in the top income classification invest in securities, with only 5 per cent of middle-income households and approximately 2 per cent of households at the bottom of the pyramid investing in securities.

Investment in urban India is higher than in rural India by more than double and the 9 major metros contribute a disproportionate amount of the investment activity. Of course, the penetration of the Indian demat account (around 14 per cent) still lags behind the near-30 per cent in China, the 30 per cent in Japan and the 40 per cent in America; which means this booming trend looks more like a shallow than a wide one.

In practice, the equity market rally over the past several years has been more of a reinforcing mechanism for savers who had plenty of savings to put to work, and a less of a narrative about national wealth creation. A financial consultant working in Mumbai, who spoke on the condition of anonymity, said that people are slowly moving funds out of bank deposits and into equities and wealth management products, and that this trend was overwhelmingly in the hands of the comfortable ones. Hence, the IPO market that raised unprecedented amounts of money over the past few years has been attracting the attention of market veterans.

A key difference between the recent share sales and the actual growth of companies is that the former may be driven by existing promoters and early investors selling units in the company, but not necessarily indicate fresh capital being invested in the company for expansion something that has a significant bearing on whether the growth period ultimately becomes a period of factory expansion, job creation, capital expenditure or a bigger pile of paper wealth for a small group of families, a former SEBI official has said.

The other, lesser talked about side of this story is the financing of aspiration among households which are not wealthy enough yet to ride the equity wave, but who are nonetheless determined to participate in the consumption upgrade that India is experiencing, regardless. Exotic expenditure items like premium durables and lifestyle items lift middle-class families, and, almost equally as exotic, a new category of digital lending has developed to help them get there.

This is not just reckless borrowing, it's a formalisation of credit that previously took place informally, via moneylenders and family networks, but now is moving onto the regulated digital rails with data underwriting, industry voices have long said. That's the argument and, in general, formal credit is safer than informal credit, but it does imply that the rise in household leverage is following the market's euphoria, and the two are not unrelated. As asset prices appear to be going nowhere and both investors and borrowers ease up, regulators have already sounded an alarm bell about retail traders losing money on massive scale while India now represents nearly 60 per cent of the volume of equity derivatives trading worldwide.

So where is the rest of the economy? It's a real positive from a structural point of view: a better equity culture among richer households is another source of domestic capital for Indian companies, and one that is less easily melted when global risk-aversion sweeps in, as in the recent bout of such risk-aversion that saw record volumes of foreign portfolio capital flow out of India. It is also a reason for Indian markets facing tough downturns during global sell-offs. Conversely, an investing boom that's focused on the top segment of the income distribution gap is unlikely to address the broader financial inclusion issue, and a consumption boom fed in part through unsecured digital credit is fragile if income growth is not matched.

The next leg of India's financialisation narrative will be observed not on how far the Sensex rises, but how far the real people fall in the income brackets who are either not investing, but are planning to, in the coming year, and whether they come on in through disciplined, low cost products or through derivative bets. Until this expansion occurs, India's stock market bubble will stay much the same as it is: a celebration of the rich's wealth to the rest of the nation, who are watching from the outside.