How India Found Financial Independence

The country has entered a self-sustaining phase of capital formation, no longer primarily dependent on foreign inflows.

- 

TWENTY-FIVE YEARS ago, ₹1 lakh crore of total profit across all listed companies was considered enormous. The reason was simple arithmetic: with price-to-earnings multiples of 15-20, the system needed roughly 5% of market capitalisation to show up as profit. A ₹200 lakh crore market cap required ₹10 lakh crore in profits for equilibrium, and that's before accounting for loss-making companies whose market caps don't correspond to any earnings at all.

Today's profit-to-GDP ratio stands at approximately 4.8%, a 17-year high, last seen in 2008. Corporate profits of around ₹16 lakh crore divided by GDP of ₹330 lakh crore puts India at an inflection point. And unlike previous peaks, this one appears structurally different. India has many more listed corporates, including a wave of internet and tech-driven businesses that will tend to be more monopolistic in nature. So, in the best of times, profit-to-GDP can very well move to 6-7%, even 8%, over the next 5-10 years.

When money stays home

The fundamental shift isn't just in valuations. It's also in the source of capital. Earlier, India never had robust, assured domestic retail flows. Today, steady inflows of domestic money continue regardless of whether individual companies make profits or losses. This raises an obvious question: will permanent domestic bids keep markets perpetually elevated?

The answer is nuanced. While the market as a whole may remain elevated, individual stocks will still face brutal discipline. The market will always keep arbitraging between good businesses and bad businesses. A company trading at ₹3 lakh crore today can be marked down to ₹30,000 crore if it disappoints. Rotation is inevitable.