Capital Markets and India’s Path to Lasting Prosperity

Rahul Bhasin, Founder & Managing Partner of Baring Private Equity Partners India, led a discussion on the nuanced relationship between capital markets and the broader economy during one of the sessions at IMA India’s Annual CFO Strategy Roundtable. The conversation emphasised the strong interplay between financial markets and economic performance. It was argued that markets can drive economic growth through mechanisms such as the wealth effect: as consumer confidence rises in thriving markets, spending increases, which, in turn, stimulates the economy. This idea casts doubt on the conventional wisdom that only economic strength drives market performance, suggesting that the reverse may also hold true.

Equities, which have historically outperformed other asset classes, owe much of their success to conditions like strong property rights and efficient fiduciary systems. While India’s fiduciary framework is sound, there remains room for improved governance to strengthen corporate oversight and investor confidence, ensuring sustained returns.

A pressing global concern, particularly in economies like the United States and China, is the growing debt burden. While excessive debt can distort markets, many countries manage this burden through inflationary tactics, gradually reducing the real value of their liabilities. This helps explain the resilience of equity markets, despite significant debt levels in these major economies.

India’s economic outlook is promising. Corporates have deleveraged, and the government’s fiscal position is stronger than that of many emerging markets. Moreover, global companies are increasingly diversifying their supply chains by relocating operations to India. However, the nation faces persistent challenges, including infrastructure gaps, malnutrition, and a shortage of skilled labour, which threaten long-term growth potential.

While market conditions appear favourable, with a growing middle class, rising corporate profits, and business-friendly government policies, risks remain—geopolitical tensions, inflationary pressures, and potential market corrections. Yet, if managed astutely, India could be on the brink of a period of strong growth and investment-driven opportunities.

This session took place on Day 2 of the IMA India’s Annual CFO Strategy Roundtable, held in Ashtamudi from 19th to 21st September 2024.