In the past twelve months, Indian equities have been one of the worst performing asset classes globally. The benchmark Nifty 50 (+1%) has been flat in the past twelve months, whereas Asian peers like South Korea’s KOSPI (+270%), Japan’s Nikkei 225 (+68%) and Brazil 50 (+36%) have yielded superlative returns. Even on three basis Nifty50 (+32%) has been sharply lower than its EM peers.
Several experts have cited a variety of reasons for India’s underperformance. For example—
· Many experts have blamed lack of adequate investment opportunities in the sunrise sectors like Artificial Intelligence and Semiconductors, for lack of investors’ interest in the Indian equities. Global investors have been consistently exiting Indian equities for the past three years, selling over Rs4trn worth of equities. Domestic HNIs have also increased their overseas portfolio investments materially.
· Some investors have cited the “very high” cost (STT + Capital Gain Tax) of investing in India as one of the key factors behind lack of investors’ interest in the Indian equities.
· Consistently depreciating INR has also discouraged most overseas investors. Pertinent to note that Nifty50 in USD terms (-9%) has massively underperformed INR denominated Nifty50 (+1%) in the past twelve months.
But in my view, the reason behind India’s underperformance is far more structural and fundamental than these micro and cyclical issues. The government policies and corporate behavior in the past 10 years have severely diminished the growth potential of India. The government has completely failed to invest in human capital and rent seeking corporations have focused on exploiting government subsidies and natural resources rather than investing in innovation. This has not only slowed down India’s growth momentum, but has crippled the growth drivers clouding any acceleration in the near term.
In this context, I would like to highlight the view of two reputable top economists – Chief Economic Advisor Dr. V. A Nageswaran and former RBI governor Raghuram Rajan.
Why Did India's Growth Falter?
From FY21 to FY25, corporate net profits tripled to ₹7.1 lakh cr (FY25) as corporate taxes were reduced by one-third and strong government investments pushed GDP growth.
Corporate India retired its debt instead of investing profits in CapEx. Debt-to-Equity ratio for companies declined from 139% to 94%.
Corporate cash reserves increased from ₹9L cr in FY21 to ₹16L cr in FY26. Private Investment to GDP ratio declined to a 20-year low from 16% during 2004-08 to 12% in FY23. FY26 investment halved from FY25.
As per Dr. V.A. Nageswaran, CEA, this reluctance of corporates to invest in growth has contributed to demand uncertainty (broken consumption) in India. Post-Covid, corporate profits of NSE 500 companies have grown at 30.8% annually. But investment has been disappointed.
The promoters and their next generations are accumulating profits and setting up family offices elsewhere rather than investing in real assets (factories, technologies, R&D etc.)
With a weakened rupee, the gap between Indian and Chinese currencies (real effective exchange rate or REER) is closing. This is the moment when Indian industry can compete in the global markets at a level footing with China.
Recent Free Trade Agreements (FTAs) have also created a level-playing field for Indian exports. Yet, India’s FTA utilization record remains poor compared to other countries.
Developed countries achieved so much because their industry acted in national interest. Now they are aggressively securing supply chains, refusing technology transfers, while India is heavily exposed to risks.
Rent seeking over innovation
In a recent newspaper article Dr. Raghuram Rajan, former RBI governor, highlights-
India’s largest “AI hub” on a 600-acre site is coming up in Visakhapatnam. LLM Models: Owned by Google; Chips: designed in California, fabricated in Taiwan; India’s Contribution: Land, Electricity, Construction, and Labour.
30 years ago we celebrated IT labour services the same way. But we did not build the next layer of technology, did not invest in R&D and deep-tech, and did not develop manufacturing depth. Now the bill is coming due in the form of AI.
Worse than 30 Yrs Ago: This time the mistake India is making is with stronger lock-in to the foreign tech owners. For every inference running on a foreign LLM model from a server in Vizag, a small rent will go to California on infra built by Adani. Same game, worse rules.
India’s AI strategy can be summed up as follows: Acres of land, tons of concrete, and gigawatts of power for a foreign-owned data center. No industry investments in AI research, labs, and scientists.
India’s Attitude: Since we are not investing in frontier AI, we tell ourselves frontier AI does not matter. Since we are good at secondary work (AI diffusion or AI services), we tell ourselves diffusion is enough.
Growing disparities
Between 2019 and 2025, the number of Indian billionaires grew by 77%, and their total wealth jumped by 227%. Now India has the world's highest number of billionaires per trillion dollars of GDP. Meanwhile, for the middle and lower income populations, real wages stagnated in the last 10 years. No GDP growth happened in their households.
There is no evidence in human history where a bunch of self-serving oligarchs have made an economy “developed”.
Conclusion
India is not yet in an economic crisis — it remains one of the world’s fastest-growing major economies. But it is certainly at an inflection point. The policy and corporate choices of the next five years will determine whether it replicates the high-investment, broad-based development trajectories of East Asia’s success stories, or settles into a middle-income equilibrium characterized by elite wealth concentration, technology dependency, and unrealized demographic potential.
The structural problems— the profit-investment gap, the AI dependency risk, the human capital quality deficit, and the inequality-consumption feedback loop — are serious and compounding. They are also solvable, provided the political economy can be shifted away from rent protection and toward productive investment. That shift requires institutional reform, credible commitment mechanisms, and leadership willing to challenge entrenched interests. It is a demanding agenda. The cost of not pursuing it, however, is considerably higher.
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