There is significant selling of Indian equities by foreign portfolio investors (FPI) in recent days.
Concerted measures are needed to boost the economy and growth rate in India.
What are the recent developments?
In July, 2019, the FPI selling has touched almost $2.5 billion, and now, seems to be accelerating.
Consequently, India has had a very tough year on a relative basis.
While the markets globally are hitting new highs, India is struggling to stay in positive territory.
In a ranking of the top 50 equity markets, in terms of performance year-to-date, India is ranked 43rd.
In all, the country is doing poorly and the Indian markets are struggling, despite its favourable economic backdrop.
What are the positive factors at play?
The government that investors wanted has come back with a much stronger-than-forecast mandate.
Oil prices are stable, and seem to be in a safe range; the top end of the range does not seem to be a level that will disrupt the economy.
The rupee is very stable; it has, in fact, appreciated post the Lok Sabha election.
Globally, liquidity is very easy and rates are declining everywhere.
Moreover, India is on the verge of starting another round of central bank easing, led by the US Federal Reserve and the European Central Bank.
Undoubtedly, India will be the fastest-growing major economy over the coming decades and definitely grow faster than China.
However, the current growth pace is less encouraging, given India's favourable position.
What are the possible reasons?
Lack of corporate earnings growth - This has been the single-biggest disappointment in Indian equities over the last 8 years.
Back in 2008, the share of corporate profits/GDP in India and the US was basically the same at about 7%.
Today, these ratios are near 10% in the US and just over 2% in India.
There has been a total collapse in corporate profitability in India over these years.
The reasons for this include corporate bank NPA clean up, higher taxes, technological disruption, economic shocks, inadequate private investment, an overvalued rupee, etc.
This aside, worryingly, the fact remains that no one has been able to forecast the turn in corporate profitability.
No one can explain when and why earnings will accelerate, beyond the obvious point that corporate profits cannot keep dropping as a share of GDP.
It is hard for the markets to resume a sustained uptrend in the absence of strong earnings growth.
Weak economy - Economic sentiment in India is very poor at the moment, among both domestic investors and industrialists.
This negativity is now affecting the global investor base.
The weak corporate sentiment witnessed in the country is more pronounced than in recent years.
Investors and companies just talk of deleveraging and hoarding liquidity, and there is no interest in setting up new capacity.
Demand scenario is less encouraging and the Non-banking financial companies (NBFCs) are only in a survival mode after the recent defaults.
Many businesses have no access to credit.
Business confidence gets even more shaken when states, like Andhra Pradesh, attempt to renegotiate signed contracts.
Tax - It is undeniable that the country needs to spend as much as possible in improving the basic quality of life of the average Indian.
However, the present approach seems to be to focus on the existing narrow tax base to get the required resources.
There has undoubtedly been huge abuse of the system by Indian industrialists.
What is the way forward?
Economy - The government to its credit has tried to lower rates in the economy, and thus boost consumption and investment.
This will help, but in addition to easing monetary policy, investors would be benefitted more by the next generation reforms in land, labour and judiciary.
This would go a long way in making India an easier place to do business.
Going forward, there has to be a better articulation of the government’s economic philosophy, priorities and game-plan for the next 5 years.
Tax - Given the need for resources in rural India, India cannot afford to give bailouts of lakhs of crores to PSUs, be it the banks, Air India or BSNL/MTNL.
Finding ways to broaden the tax base and being far more active in monetising government assets to get the money needed are essential.
