Shankar Sharma says FII outflows are not due to lack of AI and high taxes. Here’s why

At a time when market commentary is increasingly driven by quick takes and convenient explanations, veteran investor Shankar Sharma, who founded First Global, a notable financial services firm, in 1994 and later ventured into GQuant Investech in 2015, offers a sharp pushback, rooted not in opinion, but in data.

His central argument is straightforward: popular narratives around why foreign investors are avoiding India, whether it’s lack of AI exposure or tax concerns, don’t hold up.

One of the dominant claims is that foreign investors are leaving India behind and favoring markets with strong AI exposure. But a look at global market performance tells a very different story.

According to the data, some markets with fewer and fewer AI ecosystems have significantly outperformed. South Korea’s KOSPI index has returned an astonishing 149.6% for the year, while Taiwan’s TAIEX index is up 96.6%. Markets like Vietnam (74%), Brazil (59.1%), Japan (49.9%), and Pakistan (47.7%) also saw strong growth.

In contrast, the US, widely seen as the epicenter of AI, does not dominate the rankings. The NASDAQ 100 posted a 40.3% one-year return, while the S&P 500 stood at 29.4%, putting it below many non-AI-heavy markets.

The takeaway is clear: market performance is not solely tied to AI exposure. India’s underperformance is stark as shown in the same dataset. The Nifty 50 is down 12.1% in a year, while the Sensex is down 14.5%. The Nifty 500 also fell by 8.2%.

But Sharma points out a serious inconsistency in the prevailing narrative. India has never been a tech-heavy market, and yet it has made strong returns over the past two decades. If tech wasn’t the driver then, it’s hard to argue that it’s the reason for its absence now.

Another widely cited explanation is that taxation has driven away foreign investors. Here again, Sharma turns to data.

The correlation between net FII investment and Sensex returns is only 0.15 since 1999, indicating a weak correlation.

More importantly, the data shows that markets have risen and fallen during periods of both strong inflows and significant outflows. For instance, despite large negative FII inflows in some years, market returns have still remained positive and vice versa. Over the last 10 years, even with a cumulative FII outflow of -2,93,317 crore, the market has returned 226%.

The implication is clear: FII flows and taxation alone do not explain market direction.

Markets around the world have delivered strong returns regardless of AI exposure. India’s own historical performance contradicts the idea that tech is a prerequisite for success. And the relationship between FII inflows and market returns remains tenuous at best, he said on microblogging site X, formerly Twitter.

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