MARKET PERSPECTIVE

By J Mulraj

Oct 17-25, 2024

India needs to make some resets

Foreign Institutional Investors (FIIs) were net sellers of Rs 1 lac crores of Indian equity last week. Betting, correctly, that Chinese authorities would introduce financial packages to help their beleaguered sectors, including the stock and property markets, FIIs rode the Chinese dragon after getting off the Indian elephant. The Chinese central bank did, in fact, introduce a massive financial boost, and the Hang Sang jumped even as the BSE Sensex fell continually last week. Small and mid cap stocks fell sharper.

The size of the Chinese economy, it’s demonstrated power as a manufacturing hub, and its technological prowess in several sectors, make institutional investors, especially American, get enamored by their charm offensives. This seductive ability allows China to change policy directions whenever the CPC is displeased. The CPC opted to cancel the largest Chinese IPO,  by China’s Ant Group, after it was successfully raised $37 b., after its founder, the venerated Jack Ma, made adverse comments about Chinese financial regulators. Prior to that, the private education sector , which provided huge employment, and supplemented Government education, was stopped in its tracks, as was the realty sector, which contributed 30% of China’s GDP (though it was, admittedly, a bubble waiting to pop, being over-leveraged and over-built).

The FIIs timed this switch well. Indian stock markets are fortunate to have a huge cushion of domestic inflows, through SIPs (systematic investment plans). In September 2024 they received ₹24500 crores (USD 2.9 billion) helping stanch the downslide. The SIP amount is continually growing, with enough headroom, as more retail investors change their household savings pattern from fixed income to equity. It would need a major global event, either a regional conflict or a financial collapse like the 2008 global financial crisis (GFC) to stop the Indian bull.

OR it could take foolish Government decisions to discourage FIIs from investing. Such as a proposed move to increase GST  taxes on ‘luxury goods’, such as expensive watches, in order to garner an additional ₹22000 crores . This betrays two things. Myopia and hypocrisy. Myopia because the additional ₹22000 crores may be at the expense of lower inflows by FIIs who could view this as socialist rhetoric; the move would also result in either tax evasion by paying in cash,  or increased  smuggling. Hypocrisy because the policymakers mooting it would likely be owners of these ‘luxury’ items themselves.

A free market system rewards successful entrepreneurship, which creates wealth for not only the entrepreneur but for the country and for his stakeholders. This includes the generation of tax revenues that pay for the petty minded people mooting such ideas. The entrepreneur who takes risks, drives his business with passion, creates products for the citizens and revenue for the Government. Because of the license-permit raaj that prevailed for over four decades, India’s growth lagged far behind China’s. To the sad conclusion that there are now, still, 129 m Indians living below the poverty line.

Contrast with the China of the late 80s when President Deng Xiao Ping unleashed free enterprise, saying ‘I don’t care if the car is black or white, so long as it catches mice’.

No wonder China’s per capita GDP is $ 13136 and India’s is $2698.

And, as repeated often in these columns, India needs to immediately privatize continually loss making PSUs to stanch the waste of budgetary resources on them; to immediately talk to the judiciary for a time bound program for judicial reforms; to make changes in tax structures so as to tax large agriculturists, after a generous exemption (say Rs 25 lacs for farmers, ten times the exemption limit for non-farmers). This would plug the misused exemption used for laundering tax evaded money.

Make sensible policies and FIIs will throng to India, make petty ones and they won’t.

Last week the BSE Sensex closed at 79402, for a weekly loss of 1822 points.

Goldman Sachs has downgraded India from overweight to neutral because of slower economic growth and high valuations. Now, more than ever, is good governance, sensible economic policies and a serious attempt to stop corruption, needed to ensure the continuance of the India story.

A bright spot in that story was the decision by NVIDIA and Reliance to jointly develop affordable AI infrastructure. We need to encourage entrepreneurship that helps create wealth for the country. What we don’t need are petty politicians with myopic vision that drags us down.

Picture Source: Bing

Comments may be sent to jmulraj@asiaconverge.com