India: The "Anti-AI" Market Powering a Domestic Comeback

While the global financial narrative fixates on artificial intelligence, India is quietly staging one of the most remarkable economic turnarounds in emerging markets. Often dubbed the "anti-AI market," this South Asian giant is charting a unique course, driven by powerful domestic forces and bold policy shifts.

What Happened

For the past year, Indian equities have significantly lagged, baffling some global investors. Gaurav Narain, manager of the India Capital Growth trust, highlights this underperformance. Indian markets remained flat while emerging peers surged by 25 to 50 percentage points—a gap unprecedented in 50 years. This stagnation followed a post-pandemic growth slowdown. Real GDP growth, once robust at nearly 9% annually, dipped to around 6.5%. While still the fastest among large economies, for India, accustomed to stronger momentum, it felt much like a "recession," according to Narain. Corporate earnings mirrored this decline, plummeting from above 20% to single digits.

Several factors converged to create this challenging period. Elections absorbed government attention for months, delaying crucial public investments. The central bank, concerned about overheating, tightened liquidity and capped unsecured lending, pulling credit growth from 16% down to 10%. External pressures also hit, with US tariff policies under Donald Trump delaying private-sector capital expenditure plans.

Why It Matters

Despite recent headwinds, India's narrative has dramatically shifted since mid-year, signaling a robust rebound. Authorities have unleashed a series of aggressive measures to reignite the economy. In February's post-election Budget, income tax rates were slashed across the board, and infrastructure capital expenditure surged by 40% in the first half alone. The central bank didn't just ease up; it aggressively unbound liquidity-tightening measures and delivered an unexpected 100-basis-point interest rate cut—double what many market watchers anticipated.

Perhaps the most impactful move was last month’s 'GST 2' overhaul. This major reform streamlined India’s indirect tax regime, reducing a four-tax structure to just two. Many goods previously taxed at 28% moved to 18%, while others dropped from 18% or 12% to a mere 5%. This bold simplification immediately boosted market sentiment and brought down prices for consumers nationwide. The timing, coinciding with the festive season of Diwali, proved a masterstroke. Automobile sales hit all-time records, up 20% year-over-year, and retail sales soared by 25% to 40%. Even with tax cuts on 400 items, indirect tax collections still grew by about 5%, a clear indicator of increased transaction volumes. These actions collectively created an inflexion point, with the economy now firmly on an earnings upgrade cycle. Narain anticipates double-digit GDP and earnings growth, supported by positive forecasts from the IMF, World Bank, and global rating agencies.

A Domestic Powerhouse

The ownership structure of India's market also tells a compelling story. India has evolved into a fundamentally domestic-driven economy, distinguishing it from many emerging markets reliant on foreign capital. Over the past year, foreign investors have pulled out roughly $30 billion. Looking back five years, they've withdrawn $8 billion, while local funds have poured in a staggering $205 billion. This resilience means foreign ownership has hit a decade low, hovering around just 16%.

This shift is largely due to strong local participation. Thanks to rapid digitization and technology adoption, retail investors are now flooding into equities. Historically, Indians preferred physical assets like gold. Now, they're embracing the stock market, injecting significant liquidity and stability. This domestic confidence fuels an incredibly vibrant IPO market. A staggering one-third of all global IPOs are currently happening in India. Last year saw $20 billion raised, and this year is poised for even greater heights, with 90 IPOs already, including nearly a dozen exceeding a billion dollars each. Global players like Hyundai and LG Electronics are even listing 100% of their Indian businesses, drawn by the market's undeniable attractiveness and vast opportunities, particularly in the mid-cap sector.

Our Take

While India’s market might appear volatile—with individual stocks swinging wildly—this is often the nature of high-growth frontiers. The underlying trend, however, is clear: earnings growth is the key differentiator. Companies that deliver or exceed expectations are performing exceptionally well. CarTrade, an online automobile marketplace, stands out with a 95% market share, organic growth, and margins jumping from 16% to 30%. This illustrates the potential for high-quality, domestically focused businesses.

The "anti-AI" label, while catchy, belies the deep structural reforms and robust policy interventions currently transforming India. It’s a market deliberately cultivating its own strengths, focusing on consumption, infrastructure, and an increasingly sophisticated domestic investor base. While the world chases the latest machine-learning tools and generative models, India is building fundamental economic power from within. For investors, this creates a unique proposition: a vast, growing economy with reduced external dependency and a clear pathway to double-digit growth. The volatility is a feature, not a bug, for those willing to identify and back companies with strong earnings momentum. This market isn't just exciting; it's potentially setting a new blueprint for emerging market growth.

Implications for Investors

India's deliberate pivot away from an AI-centric growth model offers a compelling alternative for diversified portfolios. The aggressive policy easing, structural tax reforms, and a surge in domestic liquidity are collectively setting India apart. Investors seeking exposure to a large, rapidly growing economy with powerful internal drivers and a less correlated narrative to global tech trends might find India an increasingly attractive, albeit volatile, proposition. Identifying companies driven by genuine earnings growth will be crucial for success in what Gaurav Narain confidently predicts will be a "good year for India."