India’s strong GDP growth masks a deeper disconnect: muted revenues, weak private capex, and demand constraints that leave corporate performance trailing headline numbers
Investors assume that rapid GDP growth must automatically translate into buoyant corporate earnings; they have not examined where GDP growth is coming from. | Illustration: Binay Sinha
India’s economy continues to post headline numbers that would make most finance ministers envious. Gross domestic product is forecast to grow 7.4 per cent in FY26, according to the National Institute of Public Finance and Policy. The baseline is 7.1 per cent, rising to 8.8 per cent in a sunnier scenario. Moody’s Ratings expects India to be one of the world’s fastest-growing big economies in 2026 and 2027, at 6.4 per cent and 6.5 per cent, respectively. With global growth stuck at 2.5-2.6 per cent and China slowing to 4.5 per cent, India’s trajectory looks impressive.
Now turn your gaze to corporate results for the September quarter. Revenues of the Nifty 50 firms rose a mere 7 per cent. Operating profits grew 13 per cent and net profits just 9 per cent. For decades, a convenient rule held that Indian firms grew their top line 3-4 percentage points faster than GDP. That rule — borrowed from Western corporate cycles — has not merely frayed; it has collapsed.
The broader NSE 500 throws up much the same picture: Revenue growth of 7 per cent, and operating profit growth of 15 per cent. Only the Nifty Microcap 250 mustered double-digit sales growth (12 per cent) though even there operating profits rose only 6 per cent. Muted revenues and jumpy profits have been the norm for several quarters. How does that square with consistently high and stable GDP growth?
Tempted to blame American President Donald Trump’s tariff tantrums? India’s export sector has been a laggard forever. Net exports do not contribute anything to GDP growth. Of the top five export-product groups, most of the exports of gems and jewellery are from unlisted and smaller firms. Petroleum exports mostly head to Europe, not America. Electronics and pharmaceuticals were spared the recent tariffs. That leaves engineering goods, where only a sliver of listed firms felt any pain. Software services — the crown jewel of listed-company earnings — escaped unscathed. A weaker rupee (this year’s worst emerging-market performer, down 3.4 per cent) should have helped exporters, not hurt them. Only a few sundry other companies in the listed space (such as marine products, quartz stones, or speciality films) were affected by tariffs. The explanation for the GDP-corporate disconnect lies elsewhere.
A hint came from Asian Paints, India’s largest paint maker and a bellwether of discretionary consumption. In October, its managing director remarked — unusually candidly — that the correlation between India’s GDP growth and his company’s (or the paint industry’s) growth “has really gone for a toss”. He said he was “not very sure how the GDP numbers are coming”. Within a day, after the comment went viral, the company gave a clarification saying the comment was about the paint industry. But he was on to something important.
To start with, let’s look at it from the other end: What contributes to GDP growth?
Consumption — specifically private final consumption expenditure (PFCE) — is India’s colossus, accounting for roughly 61 per cent of GDP. If PFCE grows 7 per cent, nearly four points of GDP growth are already secured. Whether this accurately reflects the state of household finances is debatable; real wages for most Indians have hardly surged. Even so, PFCE remains the central pillar of the economy.
Investment is the next big driver. Gross fixed capital formation makes up about 30 per cent of GDP. But the mix matters. Private investment is languishing at a decade-low share of 33 per cent of total capex, hamstrung by tepid demand and familiar obstacles to doing business. Government capex, meanwhile, has been doing the heavy lifting — on defence, railways, highways, and water systems, and by state-owned companies. Government consumption — the third leg — contributes a steady 11-12 per cent of GDP and grows roughly in line with the broader economy. Combine a consumption-heavy GDP, a state-led investment push, and flat private capex, and the paradox of booming GDP and subdued corporate revenues begins to dissolve.
Investors assume that rapid GDP growth must automatically translate into buoyant corporate earnings; they have not examined where GDP growth is coming from. It is coming from private consumption and government expenditure. But if PFCE is growing around 6.5 per cent in nominal terms, then firms will grow revenues at roughly that pace — as indeed they are, especially in the non-financial, consumer companies. It is simply unreasonable to expect 3-4 per cent higher revenue growth. The private sector is adept at squeezing double-digit profits out of single-digit revenue growth.
What would align GDP growth to private-sector performance? Go back to the composition of GDP growth. The two biggest components of GDP involving the private sector are PFCE and private capex. If private consumption grows faster and private capex booms, we will have much faster GDP growth. The first was partly achieved by lower rates of goods and services tax, which boosted consumption last month, though its sustainability is yet to be tested. Unfortunately, the most impactful part of GDP growth — private capex — is not budging. Government investment averaged 4.1 per cent of GDP over FY22-25, up from 2.8 per cent pre-Covid, while private investment’s share is stuck near 2 per cent.
Policymakers continue to treat private investment as a supply-side puzzle, to be solved with cheaper capital, tax giveaways and government-led “crowding in”, most notably production-linked incentive (PLI) schemes. But the real constraint is demand, which can come from two sources: Domestic and external. Domestic demand remains weak because real wages of the vast majority of the people are not increasing. Demand can come from exports, but Indian exports are largely uncompetitive. We should stop admiring the headline growth, which captures the aggregate and confront its composition. Until private consumption strengthens and private investment finally stirs, India will keep posting impressive GDP growth — and its corporate sector will keep wondering, like the Asian Paints managing director did for a brief moment, where the boom is.
The writer is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
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