He also shares his views on Atmanirbhar Bharat as a continuity-led strategy, the cyclical nature of FII flows, and why macro stability, rather than short-term incentives, will ultimately determine foreign investor confidence in Indian markets.
Edited excerpts:
Atmanirbhar Bharat seems to have gone from design to execution. How do you see this evolving in the future? Do you expect any new Atmanirbhar Bharat related policies in Budget 2026?
Aashish Somaiyaa: Yes, if you look at the recent developments, India has taken a series of steps, be it the recent relaxations in labor laws or, earlier, the production-related incentive schemes. This has been a sustained and ongoing effort.
Despite the global turmoil caused by geopolitical tensions, one thing is unlikely to change: India is expected to remain the fastest growing major economy and the largest consumer market and workforce in the world into the future. Given this enduring advantage, most global companies will want to operate in India in the next ten to fifteen years. I see this more as a story of continuity.
You are likely to see further action in this direction. Even going back to 2019, tax-related initiatives were clearly aimed at boosting production. We are already seeing traction in sectors such as electronics manufacturing, automotive and accessories, where momentum is steadily increasing. I think this trend will continue over the next five years.
Navneet has raised the issue of FII flows, and we have seen continued outflows, especially into 2025. Do you see the government introducing any measures or incentives to discourage sales, whether driven by dollar strength or other global factors?
Aashish Somaiyaa: I think FII sales in the last 12 to 18 months have been driven by two key factors. The first has to do with the domestic slowdown that became apparent sometime in 2024. While markets led, GDP growth moderated to around 5% and earnings growth was largely flat. At the same time, RBI policy remained restrictive, government activity was subdued due to elections, and several uncertainties weighed on sentiment. That combination led to some reappraisal.
Parallel to this was a huge AI-powered rally in the US. Markets such as China, South Korea and Taiwan were seen as more central to the AI theme. Within emerging market allocation, if one market slows while opportunities emerge elsewhere, a rebalancing becomes inevitable, leading to a reallocation of capital.The second factor is structural and long-term. Globally, FIIs have increasingly moved towards the US. Looking at the long-term data, the US is the best performing stock market in dollar terms, with a compound return of around 15% over the last fifteen years.
From India, the impact is less visible because most domestic investors do not invest abroad, and India itself is the best performing market after the US. Taiwan has performed well recently, although not directly comparable. Most other emerging markets have delivered relatively poor returns. India even stood out by attracting relatively better flows and rewarding foreign investors.
Countries such as the Philippines, Vietnam, Taiwan and Thailand have seen persistent negative flows in recent years. Against this backdrop, India has outperformed most emerging markets. The recent outflows have been largely driven by the AI trade and the domestic growth slowdown.
My feeling is that this trend could reverse sometime in 2026. There has been a sword of Damocles hanging over the US market for some time now, either in the form of an economic slowdown or a market correction. Outside the AI theme, growth is limited. At some point, US markets may lose momentum, triggering a reallocation of capital. I can’t say if this will happen early or later in 2026, but I do believe we will eventually see a meaningful turnaround in flows.
Another critical factor is the stability of the currency. For FIIs to invest meaningfully, the rupee has to stabilize at a certain level – I am not saying whether that is 89, 90 or 91. When a currency depreciates, inflows are typically postponed and outflows accelerate. When the trend reverses, inflows increase and outflows slow down. FII flows are therefore driven less by incentives than by broader macro factors.
Finally, regarding taxation for global investors, WhiteOak itself is a major foreign investor, managing around $7 billion as FII. When we invest globally, we do not face the same level of taxation. In India the relative tax burden is higher. Capital gains tax can be debated, but securities transaction tax (STT) is clearly a concern. STT was originally introduced to replace capital gains tax, but today capital gains have risen even as STT has risen. This often comes up when investors compare markets and is an area that deserves attention. That said, taxes are not the main driver of the recent outflows; There are a number of other factors at play.
That’s a very good point. Tax-wise, this also exists in many other countries, but you say it’s easier for you to invest elsewhere…
Aashish Somaiyaa: We normally manage an emerging markets fund based in Dublin. From there we invest in global markets, and in most countries we do not charge taxes on our investments. However, when the fund invests in India and exits, it has to make provision for taxes. There must at least be equality, otherwise India must be compared to other global markets.
You mentioned GIFT City earlier, and Aashish also pointed out that relatively few Indian investors invest abroad. For those looking to diversify globally, GIFT City offers a credible and accessible route. Greater investment flow through this channel could also be beneficial. Would you like to add your views on this?
Aashish Somaiyaa: Yes, when it comes to taxes, there is one more point to keep in mind: Dividend tax in India is quite onerous. There are two aspects to this. Companies declare dividends from after-tax profits, and when those dividends reach shareholders, they are taxed again. This effectively amounts to double taxation and is far from ideal.
There is also a possible side effect. While I’m not suggesting this is happening today, such a structure could weaken governance by discouraging dividend payments. In effect, it encourages companies to retain profits rather than distribute them. In India, promoter ownership is relatively high: around 50% at the aggregate level. Countries like Brazil, on the other hand, if I’m not mistaken, have minimum dividend obligations, where companies are required to pay out a portion of profits as dividends.
However, India appears to be moving in the opposite direction – indirectly and perhaps perversely, discouraging dividend declarations. This is an area that clearly requires reconsideration.
Let me limit this question to specific sectors. Are there areas where you expect more incentives in the future? There used to be a strong focus on EVs. Do you see clean energy or AI emerging as the next priority areas? Infrastructure was another key focus for the government, will that remain a priority?
Aashish Somaiyaa: We have to look at this in two parts. From a market perspective, there has been a lot of excitement around defense over the last two to three years. With PLI, indigenization and geopolitical factors coming together, the theme gained traction. However, from a stock market perspective, the theme has already played out to a significant extent, which is also where the government has focused. It is therefore important to distinguish between policy focus and market prices.
Secondly, most actions lately seem to be aimed at stimulating consumption, with the government shifting its focus to the demand side. Whether it is tax cuts, VAT rationalization, the 8th Pay Commission or announcements around state elections, the focus is increasingly on demand.
I feel like the focus used to be more on capital investment, supply and infrastructure. As the cycle continues to evolve, it appears to be shifting towards revenue expenditure and demand-side measures, rather than supply-side initiatives or capital investments. That’s my interpretation of the trends, and I think new measures will be on that side rather than on capital investment or infrastructure.
So, what are your three expectations from the budget?
Aashish Somaiyaa: From a market perspective, areas of double or dual taxation – such as dividends from listed companies – need to be reviewed. The securities transaction tax (STT) was originally introduced to replace the long-term capital gains tax. Now that the long-term capital gains tax has been reintroduced and increased several times, STT is creating friction in transactions and essentially amounts to a new layer of tax. In my opinion, this warrants a serious review.
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