Why has India’s economy not kept pace with the performance of its stock market? At around 12% annually since 1991, Sensex is growing at double the rate of the economy which is about just 6% to 7%.  What explains this difference over a period of 30 years? 

It is hard to attribute these differences, really. I was just looking at some data from the US economy and I believe that if you look at the growth model, India resembles the US economy of the late 1980s and early 1990s in terms of policy, household balance sheets, etc. I think the US economy in the early 1990s through 2000s grew by about one-and-a-half times, but market capitalisation grew five times. So, there are periods when the market cap can be ahead of economy. 

After reforms in the 1990s, we saw a capital rush coming into India, including global capital. I have always believed that markets work on expectations. I do not find it surprising that markets run a little bit ahead of the economy. 

Can the Indian economy actually grow in double digits while the market grows at 15% to 20%? 

It is hard to say. If you look at our average scenario over the next five years, I would say 6% to 7%, or 7.5%, is the kind of growth that is on the table. Now, to increase it by a couple of percentage points, you really need next level stuff. I think one big trigger that has the potential to expand the GDP is reforms like production-linked incentives (PLIs).

I think one of the things that China did right was that it built manufacturing as a large industry over the past few decades. India went from agrarian to services, almost skipped manufacturing in some way. Now, PLI and other such reforms, with private capex also coming, give a thrust to manufacturing. Even in sectors like defence, you see an indigenous push to manufacturing. 

So, manufacturing will be an important part of the delta if it were to happen. I do not know whether double digits can happen, but even if 6% to 7%, or 7.5%, happens, we will achieve a $5 trillion economy by 2027.

Which sectors, according to you, have produced maximum value for investors? 

Firstly, IT and IT-enabled services have been great value creators for India. If you look at tech companies that were listed in the early 1990s, the sector virtually did not exist prior to that. But today, it has become a sort of bellwether of the indices. IT as a sector also does not get enough credit for enhancing corporate governance standards in a big way with measures like really solid succession planning. In some ways, IT companies became the benchmark.

Next, I think financials has created tremendous wealth for India, whether it is the HDFC twins or Bajaj. India benefits from an extremely robust banking sector. It is a much more cyclical industry, so it has its problems as well. But our banking system has gotten progressively better over the years with regulation. Also, financials represent 35% of the benchmarks today.

Interestingly, even PSU banks made more of a structural turnaround. Historically, lenders, like banks, have done very well. But as India’s economy evolved, you had non-lending financials like exchanges, brokerages, asset management companies and life insurance companies come into play. I am not sure of fintech because of the whole profitability issue, but yes, a wave of new financial guys will come in as well.

What are you banking on as sectors of the future? 

I would say beneficiaries of private capex, of the PLI and of the real estate boom. So, homebuilding, capital goods and the financial sector that is enabling a lot of this. Manufacturing, infrastructure and capital goods have not had their day in the sun except for maybe 2003 and 2006. Even defence is a sector now, so I think these may be the sectors of the future. 

Which sectors are likely to suffer in the coming years due to the changing nature of the Indian economy, especially with digitisation and formalisation?

Rather than sectors, I would say there are some themes. One mega trend that will continue over the next five years is the shift from the unorganised to the organised across sectors. It could be in hospitality, financial services or any other sector. Organised businesses are the business of the future. 

As I run a fund company, I always say that one will be fine investing in just diversified funds, because eventually, you do not need to overdo sectors. India is an under-penetration story. Every sector has a scope for opportunity, and every sector will have winners and losers. But unorganised sector is the place where I would worry. I think the market also has less appetite for companies which do not check the governance checkbox. This has evolved over the years. 

What do you think about tech start-ups across the sectors facing the corporate governance issue?

I find that so ironic. I said this at a NASSCOM event that if you look at all the issues that people are raising about governance in new-age start-ups and what the model should be, they do not need a role model; they have the original tech entrepreneurship model which was high on governance. That is why the sector has institutions that have outlasted the founder. You have a model sitting in your own home ground and in your own industry. I think that is that.

On new-age start-ups, we run both listed private equity and the only-retail IPO fund. I do not think there is a blanket rule. A few thoughts: there are good guys and there are bad guys. But I think the market is going to be a lot more discerning about businesses, business models and business persons. I find it frustrating when entrepreneurs come to the market saying we cannot explain our business model clearly or people are not understanding. I say, then do not list.

A company should list only when it has a business model, when it has a narrative that is clear and when it can make money in a sustainable way. There is no rush to list. Every company goes through a journey from consumers to revenue to EBITDA, so a firm has to find out where it is in the journey and then think of getting listed. 

Certain companies are becoming too big to fail in the modern Indian economy. Do you think it is good for wealth creation and economy?

I think it is inevitable. Indices have their own checks and balances; asset management companies which invest in these companies have their own checks and balances, but what can you do to control them from getting bigger? 

The thing is that there is a sort of limited capital and limited players willing to invest in some of these sectors. These are capital intensive sectors. So, I think there are limited guys who are willing to put money on the table.