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Long Live Domestic Growth

The Indian economy's reliance on domestic growth means our future lies in our own hands

As is normal in any uncertain phase of the stock markets, there are two sharply opposing views of what the immediate future holds for the general markets, one optimistic and one pessimistic. For good measure, there are also those who feel that the periodic sharp swings in either direction will continue, something which will provide ongoing entertainment while amounting to nothing more than a stagnant market.

On the one hand, it is clear that corporate results are throwing up robust growth and there isn’t much holding back economic growth in India. The spectre of high inflation is causing much debate and there’s no doubt that it is causing great hardship to a large section of the populace. However, looking at how businesses are doing, it is self-evident that, at least for the moment, high prices are not tamping down demand. We’ve heard many versions of the so-called India story over the last few years, but there’s a believable one that is now in place.

Nevertheless, the pessimists too have their logic. The political class has proven utterly incapable of controlling government expenditure. Apart from selling off assets like PSU stocks and telecom licences, there’s a complete bankruptcy of ideas on how to close fiscal gap. On the policy front also, there have been no significant reforms for close to a decade now. With the GST postponed yet again, it’s ridiculous that more than half a century after the separate countries of Europe joined together in a common market, Indian businesses have to import goods from other states.

However, from the investment perspective, one thing is clear to everyone. Whatever happens, the primary driver will be the balance between FII (Foreign Institutional Investors) inflows and outflows. Our main indices are up 17.43 per cent in 2010. During the same period, net inflows by FIIs have been around US$30 billion. This is the biggest such inflow within such a short period and the effect shows. Oh, you can argue forever between what is the cause and what is the effect—did the FIIs open the taps (faucets?) because they anticipated that stocks were going to zoom up, or did stocks zoom up because of the FII inflow? Probably a mix of both but that’s hardly inarguable.

This dependence of the stock market on the foreigner is here to stay, probably for some years to come. If a crisis turns up that reduces the amount of money that FIIs are able and willing to pour into India, then the markets are going to retreat, no doubt about it. However, in another very crucial way, the inter-linkage between the money that we make and what happens in North America or Europe is declining and will continue to decline.

The growth and profitability of our businesses are increasingly focussed domestically. The centrality that export-led industries held in our vision of future growth can finally be abandoned conclusively. The tremendous growth in domestic economic activity is what holds the keys. Sure, it’s very important that companies like TCS or Infosys or Wipro are each employing well above a lakh of people in IT and BPO services, but far more important are the crores of people that are producing and consuming the mundane goods and services that are consumed domestically.

India has certainly arrived, but in a very different way than China or before that, the East Asian tigers had arrived. For all of us who are investing in stocks, this is an opportunity that will last for a long time. Once upon a time, when the stock market declined, one couldn’t but help feel that some big opportunity had been lost, perhaps forever. From now on, it’s different. There’s no need to fret about the overall direction of the market. Your job is to choose the right opportunities from within that market, which is where we hope to help you.