Shankar Sharma does not expect India’s economic slowdown to reverse anytime soon.
While markets could see a mid-cycle rally, the founder of AI-tech firm GQuant believes fiscal constraints, weak tax growth, and currency pressures will limit the scope for a broader revival in 2026.
“Economic growth is like a giant battleship—it takes time to turn,” Sharma says, arguing that the government’s need to meet its fiscal deficit target could squeeze capital expenditure just as foreign investors reassess returns from India.
In an interview with Mint, the market veteran explains why India and the US have lagged global markets this year, what’s driving the exodus of foreign capital, and why he remains more bullish on global equities, and China in particular, than on a domestic recovery.
After stable Q2 results, there was optimism that the market would gain momentum. That optimism appears to have faded. What’s behind this range-bound phase?
The only reason to become an investor is if you are fundamentally optimistic, even in the face of the most pessimistic data. In that sense, you have to be a little deranged to be an investor.
The second-quarter results had nothing that remotely warranted bullishness. But after nearly two years of a bear market, which can feel interminable, we chose the easier option of turning optimistic, even though nothing suggested that was the logical conclusion.
What is interesting this time is that India’s bear phase is playing out against a very bullish global market environment.
Markets across the world have delivered stellar returns. My family office’s global funds have returned around 28% this year in US dollar terms.
European and Latin American markets have blown out the lights. Asian markets such as Korea have broken out of a long period of weak returns. Even Japan has done reasonably well.
The two laggard markets this year have been India and the US. Ultimately, market returns are cyclical, and the fact that both India and America are in the bottom quartile of equity returns this year is evidence of that.
America’s problems are different, and we can come back to them later. But India’s problems should concern us more.
At their core, they reflect a conflict between pleasing equity markets and pleasing people at large.
People want low inflation, and that is exactly what we have right now. It does not matter whether your personal inflation basket feels much hotter than what official data suggests—that is not the point of this discussion.
Low inflation keeps people satisfied even if growth is slow.
But low inflation is poison for equity markets. Equities perform best when inflation is slightly above average because companies gain pricing power. In inflationary periods, firms can grow revenues faster and, in turn, profits faster.
For Indian policymakers, this presents a very difficult choice. I do not envy the finance minister’s chair right now.
What’s your outlook for next year? Are there more troubles ahead?
From a purely cyclical perspective, India’s growth slowdown is unlikely to reverse quickly. Economic growth is like a giant battleship—it takes time to turn. It does not move like a small dinghy.
The core issue remains weak growth in tax receipts. Year-to-date numbers look sobering.
I have said this repeatedly over the past few years: the “stock-marketisation” of India’s fiscal policy should worry anyone paying attention. It is amply clear that capital gains and securities transaction tax revenues will fall short of estimates. That gap will have to be bridged, most likely through higher oil duties.
The other casualty will be central government capital expenditure (capex), because the government will prioritise meeting its fiscal deficit target.
All said, markets could see a mid-cycle rally, and I sincerely hope they do, but I do not expect a strong economic revival anytime soon.
What is your assessment of India’s macro picture? Rating agencies are optimistic, and the government appears focused on debt management and fiscal consolidation. Does that raise the risk of pressure on government capex?
If you look at the macro picture today, it appears broadly okay. But if you look slightly ahead, 2026-27 looks more uncertain than we would like.
One concern is that India’s forex reserves now cover only about nine months of imports, compared with the 11-month cover the country maintained for a long time.
Rupee weakness is also creating problems for capital flows.
For a foreign portfolio investor, the return arithmetic from India looks distinctly unappealing. With nominal GDP growth of around 8%, equity markets are also likely to compound at roughly that rate.
After deducting an average 15% in taxes, returns fall to about 6.8%. Factor in an annual rupee depreciation of around 4%, and foreign investors are left with less than 3% returns per year.
And then we ask why foreign investors are deserting India.
The rupee’s weakness is being viewed in different ways. Some argue it may even be deliberate, given record-low inflation. How do you see it?
Anyone who believes the Reserve Bank of India has meaningful control over the direction of the rupee is fooling himself. India simply does not have the firepower to defend the currency. Our reserves are not “earned” reserves, unlike China’s, they are effectively IOUs. You cannot use such reserves to speculate in currency markets.
The rupee’s weakness is symptomatic of a deeper problem: India is largely irrelevant in global trade. India makes nothing the world truly wants. It has no real edge in exports.
Indian companies are flat-pitch bullies, they perform well only in domestic conditions. They struggle even to sell chewing gum in Bangladesh.
I remain surprised and disappointed by how unambitious Indian companies are. I tried to buy a Tata or Mahindra electric vehicle (EV) in Dubai and could not find one. Yet I could choose from 20 different Chinese brands.
The fact is that the Indian stock market has damaged India’s long-term competitiveness. It has turned companies into slaves of what the stock market wants. And what the Indian stock market wants is a focus on domestic markets, which are protected in one way or another from foreign competition.
The market actively discourages companies from entering export markets because exports are more unpredictable and typically offer lower margins.
Indian stock markets also do not favour manufacturing businesses, and quite rightly so, which means capital flows disproportionately into services. Most of these services companies cater primarily to domestic demand, with the exception of Indian IT services.
As a result, the stock market pulls talent away from engineering and management institutes—talent that should be building global companies—into food delivery platforms and F&O apps.
I am not complaining. The Indian stock market has been extremely good to me. But the reality is that this over-financialisation of India will have very long-term consequences, and most of them will not be positive.
Are you planning to trim your exposure to US markets? Do you expect the US stock market to see a healthy correction next year?
For the past 18 months, I have been negative on both India and the US, and very bullish on global equities.
That stance has paid off. Latin America, Europe and Asia, excluding India, have been on steroids this year.
I remain bullish on Indian small caps, but they are a very high-risk segment and not for beginners.
I remain deeply negative on US equities. This year, the US sits in the bottom quartile of global market performance, something you rarely see. India, meanwhile, ranks 30 out of 35 civilized markets this year.
America’s core problem is that most of its growth is being driven by AI, while the rest of the economy is struggling. In the context of AI, we are seeing massive capital expenditure by businesses that were historically capital-light.
We liked major US technology companies because they were largely service businesses with low balance-sheet risk. That is now changing.
US big tech is increasingly taking on the characteristics of manufacturing companies, and manufacturing businesses come with far more uncertain pay-offs than services.
What is your strategy for the Chinese market?
China is the single largest weight in the global fund of my family office. I remain extremely bullish on China as a nation, based on what I have seen of its technological excellence, the ability of the average Chinese worker to put in extremely long hours, far beyond what any Indian can sustain, and a national ambition to conquer global markets, unlike India’s desire to mentally conquer Pakistan.
China is so far ahead of even the US, let alone India, that sometimes I feel it would be better if we, as Indians, did not even travel to China.
Domestically, which sectors do you find attractive over the next two to three years?
I remain extremely bullish on small technology companies in India, which I am actively looking for.
Union Budget 2026 is approaching. What are your key expectations from the government? What announcements could cheer the market?
The Indian stock market has a choice. It can age like Kareena Kapoor—still gorgeous at 45, despite a few wrinkles. Or it can age like Michelle Pfeiffer.
I have been saying this repeatedly since 2024 that the Indian bull is ageing and tired. It needs both rest and rejuvenation. It is getting the rest right now.
Rejuvenation, however, will require either higher government capital expenditure or lower capital gains taxes.
That is the final hope I have from the Union Budget to be presented in February 2026.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
