On June 28, 2023, Nifty and Sensex both scaled to new highs of 19011 and 64050, respectively, reflecting a beginning of a new era, a new perspective, and new confidence.
Three key messages that the Barometer (market indices) of the economy presented were:
Stability, the Tensile strength of the underlying economy of India, and its resilience amidst global chaos, where inflation on one side and rising interest rates on the other side, are haunting the natives most in the Western world.
Asserting confidence in the existing government that has completed nine years in office and is poised to continue with the third term having negligible anti-incumbency
The most important factor of the change in perception, change in narrative and the change in the way the world looked at India in the past. India now can command and is attracting global investors’ interest, which is a massive shift in the world’s perspective towards India. India was earlier perceived as having an agricultural orientation, and now she has established the credibility of being a holistic (all-encompassing services+manufacturing+Agri) technology-driven, compassionate, friendly nation.
The Why and How?
The year 2022 saw a breakout of Russian Ukraine war, resulting in a disruption in supply chains mainly for perishable items, which led to a surge in inflation among many other things as well, leading to a rise in interest rates to curb inflation, thereby pushing both the cost of capital and cost of equity for global investors. The result was FPIs pulling out massively in 2022 from risky global assets, including equities.
India saw an outflow of USD 17 billion in 2022, the worst in the 21st century after the 2008 crisis. India, the Indian populace, and the Indian government acted swiftly, ensuring that the fundamental flow of money doesn’t get distorted; India thus received USD 71 billion in FDI (Foreign Direct Investment) in FY 23, the highest ever for India and ensuring that stable long term money remains committed to India ensuring it’s progress. Bringing our focus back to now & today on surging stock markets and foreigners’ fickle flows into India.
Fundamentally three things that are driving FII /FPI interest in the short term:
Partial demonetisation & Forthcoming election spending
Political parties need funds and funding to drive the sentiment to win the elections. Six months before the Presidential elections in the United States and general elections in India, one can witness hyper grassroots level spending creating a multiplier effect for the economy. This time in India, due to partial demonetisation (time-bound discontinuation of INR 2000 rupee notes), the spending has been preponed (front-ended), and the effect of the same will last longer, providing handsome benefits to the lowest underbelly of the country as well, beyond the rich. This is driving spending and, thus, corporate profitability and India’s growing attractiveness towards FPIs.
The intensity of Infrastructure Orientation
The Budget 2024 made some very powerful changes in the future prospects of the country, yet received little cheer from the Indian stock markets thanks to the Banking crisis in the United States. The Budgetary allocation on Capex and on Infrastructure jumped from INR 1.88 lakh Crores in FY 14 to INR 10.01 lakh Crores in FY 24 (budgeted). With the beginning of the new financial year, in April, the government saw a massive boost in the GST collections, much beyond the projected numbers and thus the Infrastructure spending has been upfronted rather than back-ended not postponing for the later half of the financial year. This has got the cash registers ringing, creating a multiplier effect that will last a minimum of 18 to 30 months, depending on the velocity of execution, pushing FPIs to reassess their India weights.
Make in India to Protect India
The instant game changer for India has been defence spending by India. India has been a top-three defence spender in the world for the last half a century, thanks to India’s friendly neighbours (pun intended) and their zeal to poke their nose in India’s affairs.
However, in FY 24, the spending on defence jumped to INR 5.94 Lakh Crores from INR 2.24 lakh Crores in FY 14. This 165 per cent jump in a decade is not significant as the size, the need, and the requirements all have grown through the years. What is significant is that ~ 75 per cent of this mammoth amount will be spent in India. Earlier, the funds allocated to defence were sent outside India through dollars, giving employment, income, and earnings to foreign companies and countries depleting the foreign reserves of India. Once the equipment is bought, and if there is no war, no conflict, or no battle, the equipment is not productive.
Now a large part of this money is being spent on Make in India; it is igniting the cycle of demand, employment, income, and growth. These three factors have attracted the fragile FPI flows in India. With the interest rate cycle nearing its peak, the flows to India will continue to grow in the following quarters.
The structural changes and reforms undertaken through the years in India were painful, sometimes agonising, and sometimes arduous for her children, but we all grinned and bared it for Better days (Acche din) to follow, and now that time has arrived, where the most common man can benefit from the growth of India through the forthcoming years and decades.