GREY is the overbearing hue of the global economy in the current phase, painted by the unpredictable and rash strokes from the President of the United States Donald Trump. Each day, the POTUS is unleashing quirky executive orders on nations, supposedly inimical to his MAGA plans, while markets around the world are cowering under immense pressure. The sombre mood is unambiguously reflected in Indian markets, too, as since the last three months the colour of money here is red ... DARK RED. All the green shoots of being the fastest growing economy in the world are slowly withering. It is time for an honest acknowledgement of the lingering downturn and change of tack to change the colour to green. Since the turn of calendar in January 2025, the Indian economy has managed to only stay afloat due to pressing global headwinds.

 

Geopolitical tensions had already caused a significant dent to the domestic industry and with the arrival of Trump in the Oval Office, things have gone pear-shaped in the last three months. That the Union Budget also could not enthuse the markets tells the story of a looming slowdown on the otherwise robust Indian economy. Finance Minister Nirmala Sitharaman did infuse a positive energy by announcing bumper cuts in Income Tax for the middle class, but the idea of bringing the additional income from tax savings into the system to improve consumption has not quite worked. It was a bold and strategic move to boost demand and subsequently production but the industry’s lacklustre response to making new investments has come as a spanner in the wheel. The biggest indicator of waning interest in Indian businesses can be found in the massive exodus of Foreign Institutional Investors (FIIs). For the year so far, FIIs have been net sellers of shares worth over Rs 1.65 lakh crore. The sell-off has defied all expectations but it has also provided clues for the market regulator in India. Foreign investors are opting for greener pastures in other markets including the US and China. These are huge concerns for India as FIIs were net buyers of Indian equities in the last year or so making the indices zoom to lifetime highs. Since then, there have been questions over the steep rise of indices and also the high valuations of many companies.

 

The cumulative effect of all these factors is getting reflected in the downfall as investor portfolios are bleeding badly with no solution in sight. The issue of inflated valuation of many listed companies needs an urgent and serious intervention. It looked like a bubble, created by the combination of various components to jack up share prices. The rise resulted in a growing number of newbies becoming retailers as the number of demat accounts also rose sharply. Now, with below-average quarterly results, meagre consumer demand and stagnant manufacturing, share prices are in a downward spiral resulting in massive losses to the investors. The sharp contrast in share prices in just one year warrants a deeper investigation about lapses in regulator scrutiny of such companies. Defying traditional practices, the mid-cap and small-cap indices had seen a sudden spike in the middle of 2024.

 

The large-cap companies, usually a safe bet, had inexplicably fallen out of favour of the investors (including FIIs) for quite some time making the experts wonder whether something deliberate was in play to change the rules of the game. Incidentally, mid-caps are big favourites of the middle-class and a growing number of retailers were getting attracted to the mid-cap companies. The sharp decline in the last three months has now trapped the middle-class as recovery of stocks is a painfully long process. If the sudden rally was engineered to create a veneer of a pulsating market, then the reality has come back to bite in time. Now is the time for a course correction and holding the culprits accountable for creating a coating of green portfolios. The situation demands a look-in from the government. It can provide some temporary relief by offering a discount on Short Term Capital Gain tax for a limited period, at least in the small-caps and mid-caps.

 

The move has the potential to lift investor sentiment and market mood, helping retailers recover their hard-earned money and safeguarding domestic investors. The DIIs have resiliently stood up to the challenge posed by the largescale sell-off by the foreign investors. Shoring up domestic traders has to be on the priority of the Centre before global storms take menacing proportions. However, to make this happen, the government will need to undertake some back-tests and reassess the economic trajectory. It has to keep in mind that the slowdown is not cyclical but structural and can derail plans of making India the third largest economy by 2030.

 

A healthy deliberation on the warning by former Chief Economic Advisor (CEA) Arvind Subramanian about weakness in India’s economy is imperative to find ways to tackle the lingering issues of poor investment and job creation. India needs a policy for long-term growth and a robust market which must not panic by a mere sneeze in the United States. The post-pandemic recovery after infusion of stimulus has helped India overcome many blues. But it cannot be a long-term solution. Projection of being an economic force is certainly a necessity but at the same time, there needs an open acceptance of ground realities. The government should realise that policy criticism from political opponents is part of the game. It has the numbers to make a course correction. Ultimately, the government needs to assure the investors that they would not face excessive risks in the economy, and the green shoots were not a mirage.