Veteran investor Shankar Sharma has delivered a sobering assessment of India's economic prospects, stating that the current slowdown is unlikely to reverse in the near term. The founder of GQuant, an AI-tech firm, argues that while equity markets might experience a mid-cycle rally, broader economic revival in 2026 will be constrained by significant fiscal pressures, tepid tax revenue growth, and currency challenges.
The Core Conflict: People vs. Markets
Sharma points to a fundamental tension in India's current economic policy. Low inflation keeps the public satisfied but acts as "poison for equity markets," which thrive when companies have pricing power in a mildly inflationary environment. This places policymakers in a difficult position, having to choose between popular sentiment and market performance.
He notes that India's bearish market phase is uniquely playing out against a bullish global backdrop. While European, Latin American, and several Asian markets have delivered stellar returns, India and the US have been the notable laggards in 2024, both sitting in the bottom quartile of global equity performance.
Fiscal Squeeze and the Capex Conundrum
A primary concern for Sharma is the weak growth in tax receipts. He warns that the government's reliance on capital gains and securities transaction taxes is proving unreliable, with revenues likely to fall short of budget estimates. This shortfall will likely be bridged by higher duties on oil, he predicts.
The more significant casualty, however, will be central government capital expenditure (capex). Sharma expects the government to prioritise meeting its fiscal deficit target, which will inevitably squeeze public spending on infrastructure and long-term projects. "The 'stock-marketisation' of India’s fiscal policy should worry anyone paying attention," he remarked.
Why Foreign Investors Are Deserting India
Sharma provides a stark arithmetic for foreign portfolio investors (FPIs) that explains the ongoing capital exodus. With India's nominal GDP growth around 8%, equity returns might compound at a similar rate. After deducting taxes (~15%) and accounting for an annual rupee depreciation of about 4%, foreign investors are left with real returns of less than 3% per year in dollar terms. "And then we ask why foreign investors are deserting India," he stated.
He dismisses the notion that the Reserve Bank of India (RBI) can strategically manage the rupee's weakness, stating India lacks the "earned" forex reserves, unlike China, to defend the currency meaningfully. The rupee's decline, he argues, is symptomatic of a deeper issue: India's lack of relevance in global trade. "India makes nothing the world truly wants. It has no real edge in exports," Sharma said, criticising Indian companies for being "flat-pitch bullies" who perform well only in protected domestic markets.
Long-Term Competitiveness at Risk
Sharma expressed disappointment at the lack of ambition among Indian corporations, contrasting it with China's global drive. He shared an anecdote about being unable to find a Tata or Mahindra electric vehicle in Dubai, while having over 20 Chinese brands to choose from.
He argues that the Indian stock market itself has damaged long-term competitiveness by turning companies into "slaves" of quarterly earnings. The market discourages forays into lower-margin export markets and does not favour capital-intensive manufacturing businesses, thereby steering talent and capital towards domestic-focused services like food delivery and trading apps instead of global industrial ventures.
Investment Strategy: Bullish on Global, Cautious on Domestic
Sharma revealed that for the past 18 months, his family office has been negative on both Indian and US equities but very bullish on global stocks—a stance that has paid off. China is the single largest weight in his global fund, citing the nation's technological excellence, worker discipline, and ambition to conquer global markets.
Within India, he remains extremely bullish on small-cap technology companies, though he cautions this is a high-risk segment. For the broader market, his final hope for rejuvenation lies in the upcoming Union Budget for 2026-27. He believes a meaningful revival would require either a significant boost to government capital expenditure or a reduction in capital gains taxes.
Concluding with an analogy, Sharma said the Indian bull market is "ageing and tired." It needs both rest and rejuvenation. While it is getting the rest now, the budget in February 2026 will be a critical test for providing the latter.
