Buy when there is blood on the streets, even if the blood is your own,” said Nathan Mayer Rothschild, the 18thcentury banker who singlehandedly founded a financial empire. What a pity overseas investors don’t share his contrarian views on their India portfolios.

In the first quarter, profits shrank. Businesses are struggling to understand the goods and services tax (GST), supposed to simplify our earlier indirect taxes. The gap between imports and exports is widening and GDP growth is down.

Money Flees, Through FIIs…

Figuratively, there’s blood on the streets. Global investors ought to be gorging on Indian stocks. Well, no. In August, foreign institutional investors (FIIs) sold around Rs 17,000 crore worth of paper assets. Through the first four trading days till September 6, FIIs sold every day. Remember, these are sales net of purchases. September’s FII sell-off is already Rs 3,500 crore.

In a month and four days, FIIs have sold around $3 billion worth of assets. Domestic institutions have tried, heroically, to stanch this outflow, with little success. A lot of folks in the markets are wondering what went wrong.

One, a huge bubble in Asia and Pacific markets is now leaking some air. In one month, Asia-Pacific has lost around 0.4% in equity values. Japan, Singapore, Pakistan, Hong Kong-listed companies, South Korea, Taiwan and Australia are in the red, with India. Investors in China, New Zealand, Malaysia, Indonesia and Bangladesh have pocketed gains.

Two, as Swaminathan Aiyar pointedout recently (‘Why DeMo, GST Are Not to Blame for Slowdown’, Sunday TOI, goo.gl/K2YQDB), no country has ever grown consistently if it imports more goods and services than it exports. We’ve seen that in exportled, post-World War 2 Japan, in the rise of Southeast Asian ‘Tigers’ like Malaysia, Taiwan and Indonesia, and in China, the global factory.

But in the last 68 years from 1949, for which reliable numbers are available, India had a trade surplus only twice. The first, worth $135 million, occurred in 1972-73. The next surplus, of $76 million, was in 1976-77. For a while, during the mid-1990s to the early 2000s, it was said India could import its way to high growth.

This is only possible if growth is so high that our appetite for consumption has to be fed from suppliers worldwide. And this deficit has to be made up by equally large inflows of foreign investment to balance the books.

Recent number-crunching by global investor JPMorgan supports the export-growth link. During 2003-08, exports grew at 17.8% every year, supported by average annual growth of 8.8%. Through 2013-17, GDP growth has been 6.9% per year; export growth is crawling at just over 3% annually.

Many economists have (correctly) argued that November 2016’s demonetisation of nearly 90% of our currency dealt a big blow to small and medium industries. These dominate sectors like textiles, gems and jewellery, processed food, car components, segments of engineering and manufacturing, and so on. They pay their informal workforce in cash. Many companies have to deal with retailers and farmers in rural India in banknotes.

…Or Through Imports

As cash vanished, these sectors, which contribute heavily to exports, also slowed. During the first few months after demonetisation, exports crawled or shrank. From October’s 9%, export growth fell to 2.6% in November, when demonetisation was implemented. Between January and March this year, exports contracted.

Economics 101 says the export fall could have been arrested by a falling rupee, making them more competitive. But through November 2016 and February 2017, the rupee was well under its October level, measured against a basket of six major currencies, including the dollar, euro and Chinese yuan.

Abigger mystery surrounds imports, which have been surging from October 2016 to June this year. Through this, India wasn’t really growing fast enough to generate big demand hikes for phoren goods and services. Importsare supposed to grow when the rupee strengthens against other currencies. In this period, the rupee was actually weaker than in October 2016.

So, what gives on the import front? There was no big increase in domestic demand, no major hike in oil prices, nor a dramatic strengthening of the rupee to justify a nine-month import spike, peaking at nearly 47% in March. So, there is probably only one thing that explains the import rush: capital flight through mis-invoicing.

This is common in countries like China and India, which try to keep a tight leash on capital flows. But one way for companies with global exposure to get around this is to over-value imports and take money out to other markets.

Suppose the actual cost of something I import is $50. However, I ask the seller to send me a bill for $100. So, $50 pays for my import, the other $50 stays somewhere overseas. This extra $50 is a loss for India’s reserves. But for savvy businesses, it is a powerful hedge against economic or other uncertainties.