AI’s Impact on India’s Economy
Hello, this is Priyanka Salve writing from Singapore. Welcome to the latest edition of “within India” — a hub for stories and developments from the world’s fastest-growing large economies.
This week, we’re diving into how AI-driven advancements at TSMC, Samsung, and SK Hynix are altering the landscape of Asian markets. It seems the focus on AI is starting to overshadow India’s consumer story.
Big Story
In 2026, Animal Spirit intends to promote investments in AI-focused companies, specifically targeting TSMC, Samsung, and SK Hynix, projected to exceed $1 trillion. This shift doesn’t bode well for India, noted as the fastest-growing major economy, particularly since it hasn’t yet tapped into AI at a significant scale during a time of high domestic demand. Households are grappling with rising inflation, a devaluing currency, and a shortage of quality job opportunities.
Experts argue that declining consumer spending coupled with rising input costs linked to the Middle East conflict could further dampen corporate profits by the fiscal year ending March 2027. This, in turn, may heighten foreign investors’ inclination to withdraw from the market.
Recent data reveals that foreign investors sold off Indian stocks worth $27.6 billion, a stark increase from $18.9 billion in 2025, according to figures from Indian custodian NSDL.
On the flip side, the market capitalization of Indian counterparts has surged. For instance, on May 26, Taiwan’s market capitalization swelled to nearly $5 trillion, outpacing India as the world’s fifth-largest stock market. A week later, South Korea managed to do the same, pushing India down from sixth place.
The dynamics seem to have shifted against India rather abruptly.
Market Trends
About 18 months prior, India’s stock market capitalization was 3.5 times that of South Korea and more than double that of Taiwan, according to a report from Bernstein analysts. Nitin Jain, CEO at Kotak Mahindra Asset Management Singapore, reflected that India was once a leading market but deteriorated in perception over a short span. He mentioned, “In less than two years, India’s story went from a great narrative to one that few want to discuss.”
The Relationship Between AI and Consumption
AI has become a crucial theme, and investors are unlikely to shift focus to other markets unless there are notable improvements within this field, Jain pointed out. Meanwhile, the Kospi 200 in Korea has surged over 130% this year, and Taiwan’s FTSE TWSE 50 has increased by more than 60%, both performing better than all other Asian markets. In stark contrast, India’s benchmark index is the only one in negative territory, down over 10% according to LSEG data.
Venugopal Ghar, managing director of India research at Bernstein & Co., stated that India has significantly fallen behind in AI advancements.
He noted that India lacks a robust semiconductor manufacturing ecosystem. On the service side, IT companies are focusing largely on labor-intensive services, which can be risky and capital-heavy. Yet, the absence of AI may not be the sole reason behind global investors’ exit from the Indian market.
Weak Revenue Cycle
“Brazil has no AI entry, yet its market thrives,” observed Sridhar Sivaram, investment director at Enum Securities in Mumbai. Despite India’s lofty valuations, profit growth was “very modest” last year, he added.
Research from Alpine Macro shows that Indian stocks currently trade at a forward P/E ratio of 21, similar to Taiwan, while Korean stocks sit at 9. Global brokerage firm Nomura has revised its profit forecast for the fiscal year ending March 2027, trimming it by 4% for the 256 top Indian companies it tracks, primarily due to the turbulence from the Middle East conflict.
This diminishing allure of Indian stocks is evident in the MSCI index, where the weighting of Indian stocks is expected to fall from around 20% in 2024 to about 11%.
Even if tensions in the Middle East ease, long-term concerns continue to undermine investor confidence regarding India’s consumer patterns.
Advancements in automation and robotics are, in a way, diminishing the competitive edge of India’s low-cost labor force, while the rapid uptake of AI raises questions about the future for many in India’s IT sector. Yang Wang, a strategist at Alpine Macro, remarked that even with a geopolitical resolution, these elements, along with consistently high valuations, could keep foreign investor enthusiasm at bay.
Need to Know
India’s central bank might mirror Indonesia’s approach by raising interest rates to safeguard its currency.
While there are expectations to maintain the current policy interest rate, the anticipated monetary policy meeting may address the dual risks posed by a declining currency and rising inflation.
Coca-Cola is considering a 2027 listing for its Indian bottling unit.
The multinational has started preparations for listing its Indian subsidiary, Hindustan Coca-Cola Holdings, on the Bombay Stock Exchange and the National Stock Exchange of India.
Upcoming Dates:
June 5th: Monetary policy decisions from the Reserve Bank of India.
June 5th: India GDP figures for January to March.
