India’s economy continues to post headline numbers that would make most finance ministers envious. Gross domestic product (GDP) is forecast to grow 7.4% in FY25-26, according to the National Institute of Public Finance and Policy (NIPFP). The baseline is 7.1% growth, rising to 8.8% 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% and 6.5%. With global growth stuck at 2.5%-2.6% and China slowing to 4.5%, India’s trajectory looks impressive.
Now turn your gaze to corporate results for the September quarter. Revenues of the Nifty 50 rose a mere 7%. Operating profits grew by 13% and net profits by just 9%. For decades, a convenient rule held that Indian companies grew their top-line three to four percentage points faster than GDP. That rule—borrowed from Western corporate cycles—has not merely frayed; it has collapsed.
The broader NSE 500 shows much the same: revenue growth of 7%, operating profit growth of 15%. Only the Nifty Microcap 250 mustered double-digit sales growth (12%), though even the operating profit rose only 6%. 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 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-5 export product groups, most of the gems and jewellery exports are from unlisted and smaller firms. Petroleum exports mostly head to Europe, not America. Electronics and pharmaceuticals were spared from 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%) should have helped exporters, not hurt them. Only a few sundry other companies in the listed space (such as marine products and quartz stone 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 May 2024, 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, he walked it back. But he was onto 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% of GDP. If PFCE grows by 7%, 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% of GDP. But the mix matters. Private investment is languishing at a decade-low share of 33% 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, water systems and by State-controlled companies. Government consumption—the third leg—contributes a steady 11%–12% 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 (capital expenditure) 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 the GDP growth is coming from. It is coming from private consumption and government expenditure. But if PFCE is growing by around 6.5% 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 a 3%-4% higher revenue growth. The private sector is adept at squeezing double-digit profits out of single-digit revenue growth.
What would align GDP growth with 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 GST rates, 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. Overall, government capex averaged 4.1% of GDP over FY22–25, up from 2.8% pre-COVID-19, while private capex's share remained at around 11% of GDP.
Policy-makers 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 the production-linked incentive (PLI) schemes. But the real constraint is demand, which can come from two sources: domestic and external. Domestic demand remains weak since the real wages of the vast majority of people are not increasing. Demand can come from exports, but Indian exports are largely uncompetitive. We should stop admiring the headline growth that 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 MD did for a brief moment, where the boom is.
(This article first appeared in Business Standard newspaper)
Does it throw some light on rising 'services' sector as a part of GDP which is now roughly at more than 60% of GDP composition. And since much of the services sector remains out of the GDP framework and that this sector is not 'corporatized' , therefore, corporate profits are not representative of GDP figures.
There seems to be some confusion about the statistics quoted in the piece. First, the article says that pvt capex accounts for 33% of GFCF. Since GFCF is 30% of Indian GDP, it means that pvt capex is 10% of GDP. Later on, the article says that pvt investment's share is stuck at only 2% of GDP. 10% vs 2%...What am I missing?
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