Over the last few trading sessions, the stock market has been trending downward.
What is the reason for this sudden reversal?
Actually, there are many reasons for this, some visible and some invisible.
The world loves to invest in a market where they see potential, where there are a large number of consumers for the goods and services that they are producing or the companies where they hold substantial investment, are producing.
They love consumption and hate uncertainty. They love stability and are afraid of an economy that is tottering.
The prime reason foreign investors love India is because of its huge market. At 1.4 Billion and growing, there is ample opportunity to sell everything that can be produced and sold. Even considering that top 10% is their target market, that still translates to 140 million consumers, much larger than entire population of many countries. It is a growing economy where there is still a need for refrigerators, washing machines, televisions, air-conditioners, etc. etc.
Foreign investors are also seeing the sale of luxury goods taking the uptrend in this market. Luxury cars, watches, bags, apparel are all selling like there is no tomorrow. They are very interested in this trend. As per some estimates The luxury goods market is estimated to grow at 10% CAGR.
So, the question is why are they suddenly leaving India and taking out their investment?
For one, the 2024 General Elections have produced a weak verdict and Narendra Modi, their darling, is no longer in full control of the economy.
Two is that there is rampant tax-terrorism in the country, making people wonder whether there is any sense in doing business in India.
Three is the Gaza conflict with Israel, a war that has now expanded to Iran and Lebanon, leading to rise in crude prices. Any increase in crude prices impacts India adversely.
Four is that for the first time in history China has done quantitative easing and given money as dole to its citizens. China is almost the same size market as India in terms of total numbers with a difference. China does not have the income disparity that India has. Thus the chances of selling stuff to China is much higher and Chinese too are buying luxury goods as their lifestyle has been improving over the years.
Also, China is a much more stable business environment. It does not have a tax-gouging government like India.
Money will always chase the best returns. At the moment, China is a more lucrative market than India and the money has started moving there.
Businesses don’t really understand geopolitics, they only understand profit and money. They will go wherever the profits are more and money is assured.
In India, the biggest challenge has been currency devaluation. This hurts investments. RBI has been doing a lot of market operations to keep the rupee holding its value but it has limited capabilities. There is just 700 Billion USD as reserve and most of it is already dollar denominated, thus tying down its hands.
The markets are over heated too. Equities are trading at astronomical P/E ratios. This makes for a nervous investor, an investor who will flee at the first sign of trouble.
That is what is happening. There are many signs of trouble in India. A jobless growth economy coupled with runaway food inflation is eroding savings and contracting purchasing power across the board. The middle class is slipping into poverty and almost 60% of poor are living on free government handouts. The government dare not stop these handouts, else the country will face a civil war like situation. All politicians and governments are always afraid of uprising of the masses.
The flight of money will exacerbate the crisis situation in the country. With the BJP slated to lose elections in five states where elections happen till Feb 2025, the situation is looking grimmer as days go by.
More reason for foreign capital to take flight out of the country.
This is an eyeopener