In 1991, when the stock market broke free of its chains in the first flush of liberalisation, you could easily have imagined a beeline of investors making for Dalal Street, eager to participate in the vast new opportunities opened up.

You would have thought that it would be entirely in the spirit of the times if more and more households across the length and breadth of the country entrusted more and more of their savings to the financial markets.

After all, in an age when the market economy had triumphed over all others, what better way to participate in its glories than to put your money in stocks and bonds?

Sadly, you would have been completely wrong. The latest Reserve Bank of India data on "Changes in Financial Assets of the Household Sector" show that despite the 100 per cent gain in the stock market in 2003-04, Indian households invested a mere 1.8 per cent of their savings in shares and debentures last fiscal.

And, by the way, that figure includes investment in mutual funds as well. As a matter of fact, if you include the redemptions from the Unit Trust of India, household investment in market-related assets falls to a pitiful 1.36 per cent. Putting it simply, for every rupee saved by households last fiscal, only 1.36 paise were allocated to stocks or bonds. That's the lowest percentage since liberalisation.

Things weren't always so bad. For a few years after the markets were freed, households did indeed pour their savings into the financial markets. In 1991-92, for instance, they invested 9.9 per cent of their savings in stocks and bonds, thanks largely to Harshad Mehta.

The following year, this percentage went up to 10.2, falling steadily thereafter till it reached a nadir of 2.5 per cent in 1998-99.The tech boom gave fresh hope to investors, and households put in 6.9 per cent of their savings in the markets in 1999-00. It's been downhill all the way since then. What's more, if you include units of the Unit Trust of India, households invested as much as 23.3 per cent of their incremental savings in market-related instruments in 1991-92.

It's pretty clear that the series of financial scams since liberalisation have badly shaken the faith of the "small investor" in the market, with the result that he has become notoriously risk-averse. The UTI meltdown was the last nail in the coffin, and there have been sizable net redemptions from the UTI for the last four years.

Unfortunately, this risk aversion has hurt households financially, because they have been unable to take advantage of the stock market rally in the last 18 months, as well as the rally in the bond market resulting from the steady fall in interest rates.

The biggest irony is that Indian investors currently put a smaller proportion of their savings in stocks and bonds than they did before liberalisation. Compared to 2003-04's 1.36 per cent, households invested 10 per cent of their savings in stocks, bonds, and units in 1989-90.

Why, even in 1970-71, the socialist Indian household put in 3.88 per cent of its savings in stocks, bonds, and units, a higher proportion than what the young, financially savvy, economically liberated, modern households put in market-related instruments in the last three years.

So which financial assets do Indian households like? That are very fond of bank fixed deposits, putting in 42.8 per cent of their savings in them last fiscal. They like bank deposits so much that they have been steadily increasing the proportion of their savings invested in them in the last four years, in spite of the fact that interest rates have fallen steeply over the period.

And, guess what, households invested only 28.9 per cent of their savings in bank fixed deposits in 1989-90, before liberalisation. Go back to the dim mists of socialist antiquity, and they invested 35.7 per cent of their savings in bank deposits in 1970-71, compared to 2003-04's 42.8 per cent.

Households clearly believe that it's better to be safe than sorry. The strange thing is that in spite of dematerialisation, rolling settlements, T+2, mark-to-market margins, the Clearing Corporation, and all the myriad improvements in the last decade that our regulators are constantly pointing out, the small investor obviously believes that the risk in our markets is not only too high, but that it is even higher than what it used to be before liberalisation.

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