Muhammad Arsalan Jamal Ghouri
In October 2024, foreign investors pulled out about $940 Million from India, making it the worst month in the 2024-25 fiscal year in terms of outflow. This selloffset is indicative of deepening problems regarding India’s fundamentals which are viewed as shaky as the country’s stock market soars and global interest rates climb. Even though such withdrawal is likely to be attributed to both international and domestic factors, the evidences strengthen the concerns over the sustainable growth of India.
The record outflow in October 2024 reduces the investment possibility for foreign investors analysing India’s growing suspicion to investors looking at its stock market against the backdrop of emergent markets such as China. The average price to earnings ratio of the Indian stock market remains higher than the emerging markets counterparts except Indonesia (India average P/E is 22.3 while China is 10.5). While international investors look for higher returns, high valuation of Indian equities, high interest rates and relatively weaker growth outlook has forced them to look at the better-valued countries such as China for investment.
However, another look at some economic averages in India shows both cyclical and structural weaknesses. For example, youth unemployment that currently is running over 20% in the country, inflated inflation rate of about 8% and trade deficit for the fiscal year 2023-24 is $240.2 billion. There is still a massive problem of inequality in the fair distribution of wealth; only 10% of the population owns 77% of the country’s wealth as established by an Oxfam study 2023. These disparities coupled with the fact that 83 million people still live below the poverty line and 163 million people still live in multidimensional poverty. These economic factors combined with high inflation rates and a slow employment rate make the country substandard in the attraction of the global investors. The structural problems that are rather evident in the contemporary Indian economy are evident in increased centralization of power in the hands of the dominant business houses which are currently dominated by the Adani conglomerate.
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Adani does not have killer acquisition strategies in opposition to other rivals; however, its competitive empire expansion in the different sectors of energy, renewable resources, ports, airports, etc., have led to criticisms about monopolization of the market and unfairness that comes with it. Evaluating Adani’s financing alternatives, together with its concentration on sure strategic sectors and dependence on debt thus poses systemic risks that could risk India’s destination if shaken by elevated financing prices. The business affiliations between the Adani Group and the current central government led by Prime Minister Narendra Modi have been referred to as “Modani” and it has only heightened suspicions that some regulatory policies may be specifically tilted in favor of large select players and this is something that may not sit well in the stomach of most foreign investors who are prone to loosing their investments to regulatory capture in developing countries like India. The current concentration of economic power creates a situation that the Indian market is becoming less attractive to investors that would like to have an opportunity to compete on a level playing ground.
Apart from these structural issues the global factors also are having great impact on capital outflows from India. The US Federal Reserve and the other developed economy central banks, including the European Central Bank, hiked up the interest rates due to inflation. These high rates also make bonds in these markets more desirable to foreign investors resulting into emerging market capital flight – India inclusive. Due to the steady increase in borrowing costs around the world investors have shifted their risk tolerance and the emerging markets like China and the world offering better bargains given the conditions of recovering from the impact of the covid-19 pandemic.
China targets increasing growth through a fiscal stimulus as well as the push towards an economic reform that presents a more attractive setting for the investment. Relatively, many foreign investors have inclined toward China.
Moreover, liberalisation of economy means that India has slowly moved closer to the western economies and this has its own dangers. As for the geographical changes in trade relations, the intensification of strategic partnership with the USA and the EU implies new challenges for the balance of power in the Indian foreign policy.
While global investors, on the prowl for stable markets with clear and credible economic policies, may not find India’s political condition conducive, its ‘business friendly’ although often somewhat ‘murky’ regulatory climate is a problem. That is why it has been noted that the situation around protectionism, indefinite regulations and non-transparent issues for example in the sphere of taxation and land management raise many questions to the future of investment attraction in India.
The others contributing factors include contrived capital outflow, failure by the Indian government to undertake genuine reforms. India has showcased its development agenda through its ‘Make in India’ and several other programs launched while the progress of reform measures has been comparatively slow in such critical areas of operation as labor factors, land acquisition, and ‘Ease of Doing Business’. Local and foreign investors are therefore disgruntled by the numerous bureaucratic hurdles in the government that slow growth and decrease corporate value. The failure to progress on these significant reforms made India a comparatively less attractive market for businesses compared to other emerging economies that have aggressively pursued a path to rationalization of the regulatory environment and enhancement of the ease of doing business.
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Therefore, realizing that in October 2024 the outflow reached $ 11.2 billion, it is necessary to underline the fact that India’s policymakers seem to wake up albeit the structural problems that still haunt the country’s potential. India being part of the emerging markets in Asia, is somewhat overvalued at the moment when it comes to its stock market in comparison with competitors, and it has serious problems with its actual economic situation. A synoptic view of the situation revealed that large conglomerates dominated the economy, the pace of reforms is slow, and external factors such as increased cost of borrowing due to movements in international interest rates are all combining to make the investment environment less attractive.
The views expressed in this article are those of the author and do not necessarily reflect the official stance of The Diplomatic Insight or its editorial board. The content is provided for informational purposes only and should not be construed as an endorsement of any particular viewpoint, policy, or action.
