ROI-India's booming growth has an earnings problem: Manishi Raychaudhuri

India may be the world's fastest-growing major economy, but its stock market is among the worst performers in emerging markets. That's because economic growth has not ​translated into corporate earnings growth. The question is whether that will change.

GDP growth doesn't drive share prices; earnings do. Over ​the last five quarters, India's real GDP growth has hovered between 7.7% and 8.6%. This reflects ‌initiatives ​to support consumption and investment, including personal-income and goods-and-services tax cuts, and higher spending on roads, railways, power and urban infrastructure. Yet the country’s Sensex index has risen only 8% in that period and is down roughly 15% this year through October. The disconnect comes down to one thing: sluggish earnings.

The trajectory of Indian equities since 2001 looks less like a steady climb and more like a step function. From 2003 ‌to 2007, the FactSet Market Index for India grew at a compound annual growth rate (CAGR) of 54%. This was driven by robust underlying earnings growth of 32% a year, reflecting a capex boom and favourable global liquidity.

Over the next 12 years, earnings — and the equity market — stagnated as indebted companies cut investment after the global financial crisis, while demonetisation, the GST rollout and a 2018 liquidity crisis among non-bank lenders disrupted growth and credit. The next leap came between early 2020 and mid-2024, when the market compounded at 34% a year as corporate earnings grew by 18% annually, driven by ‌a revival in bank lending, public capital spending, investment incentives, lower corporate tax rates, and a post-pandemic surge in technology-services demand.

But momentum reversed sharply in late 2024. Earnings growth has remained in the single digits after years of unusually strong gains, as growth normalised and ‌higher energy and industrial-input costs squeezed margins. That weakness has coincided with a more than 20% decline in the index, according to FactSet. An AI-driven earnings boom in North Asia made India’s earnings-per-share (EPS) growth look especially pedestrian. WHAT AILS PROFITS?

India’s GDP growth since mid-2025 was driven largely by government spending on infrastructure and a surge in private consumption, fuelled by the country’s 2025 tax cuts. But these efforts could not offset margin pressure from local and global forces.

Raw-material prices spiked, exacerbated by conflicts in the Middle East and between Russia and Ukraine. Indian companies have struggled to pass these costs on because of limited pricing power. Since October 2024, the spread between retail and wholesale inflation — a key indicator of manufacturers' pricing ⁠power — has narrowed as ​higher energy, input and transport costs lifted wholesale prices, while weak demand and ⁠intense competition constrained companies' ability to pass those costs on.

Consumer durables and staples have been among the hardest hit. EBITDA margins in consumer durables fell to 7.4% in the September quarter, from 11.7% two years earlier, according to FactSet. Exposed companies include appliance and electrical-goods makers Havells India and Voltas , as well as jewellery and watchmaker Titan. Staples ⁠groups, including Hindustan Unilever and Godrej Consumer Products, have struggled to pass higher costs on to price-sensitive consumers. AI is also pressuring India’s flagship technology services sector. Margins are down modestly, to 21.17% from 22.37% two years earlier, but are expected to fall further as AI reshapes demand for traditional outsourcing.

HOPES FOR REVIVAL Can corporate India ​pull itself out of this earnings slump? Some sectors are gaining momentum.

In financials, bank credit growth accelerated from 9% year-on-year in May 2025 to 19.4% in September, pointing to stronger revenue growth for lenders such as ICICI Bank and State Bank of ⁠India. The pickup is driven by digital expansion, consumer borrowing, and ongoing infrastructure investment — not solely by government programmes. Meanwhile, an interest-rate hike cycle, which many economists anticipate given elevated inflation, could widen net interest margins.

Industrials and technology hardware are also experiencing strong earnings growth, both benefiting from the massive infrastructure and energy capacity buildouts, as well as the data-centre boom. Overall, Indian earnings are ⁠expected ​to record a CAGR of 16.5% over 2027 and 2028, according to FactSet consensus estimates.

Importantly, FactSet projects this growth will outpace Asian earnings by 2028, as rapid expansion at North Asian technology leaders — including Samsung Electronics, SK Hynix and Taiwan Semiconductor Manufacturing — slows. India's sharpest market downturns, in 2010–13 and 2024–26, coincided with domestic earnings trailing the wider region. A reversal of this trend would boost domestic stocks.

For investors, however, the Indian market remains risky. There's no guarantee that forward earnings estimates will not be downgraded, as they were over the past two years. One positive sign ⁠is that consensus EPS estimates for 2026 and 2027 have held flat through the Iran war even as energy prices have spiked, highlighting expectations of resilience.

If the war subsides and commodity prices abate, Indian earnings could surge further, potentially boosting equities. Conversely, if the conflict ⁠drags on, higher commodity prices could further weaken earnings. Ultimately, India's outperformance will depend ⁠on the successful translation of economic momentum into corporate profits. Otherwise, the market could continue to test investors' patience, which is already wearing thin.

(The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd and the former head of Asia-Pacific Equity Research at BNP Paribas Securities.) Enjoying this column? Check out Reuters Open Interest (ROI), your essential new source for global financial commentary. Follow ROI on ‌LinkedIn, and X.

And listen to the Morning Bid ‌daily podcast on Apple, Spotify, or the Reuters app. Subscribe to hear Reuters journalists discuss the biggest news in markets and finance seven days a ​week. (Writing by Manishi Raychaudhuri; Editing by Marguerita Choy and Anna Szymanski)