Earnings Recovery May Stall Under The Weight Of Fiscal Fatigue

Equity markets* have rallied on hopes of a corporate earnings revival in 2025, buoyed by easing inflation and the prospect of rate cuts from the RBI. But this rebound risks running ahead of fundamentals. Fiscal spending is cooling, wage growth is subdued, and labour market quality is deteriorating—hardly the ingredients for a broad-based income recovery.

The fiscal engine that once powered demand is now pulling back. The central government’s real revenue expenditure, excluding interest payments, shrank 1.6% over the three months ending January 2025, after a burst of 23.6% growth in October 2024. With tax revenues faltering, fiscal consolidation has returned, dragging on public sector demand and denting corporate toplines. This fiscal retreat is already weighing on business revenues.

Compensation trends reflect the drag. In the October–December quarter, non-financial sector employee expenses rose just 7.4%, barely up from 6.5% in the prior quarter, and far below the 16.4% surge seen in early 2022–23. In real terms, pay growth was anaemic: 2.4% for non-financials, -0.2% in financials, and only 2.8% in manufacturing. India Inc is in no hurry to reopen the compensation taps.

Jobs data adds to the unease. The urban Periodic Labour Force Survey for the December quarter shows labour participation and employment ratios plateauing at best. But employment quality is slipping. Much of the recent male job growth came from self-employment, not stable wage-paying roles. Manufacturing jobs declined further, while services made only marginal gains.

Urban male unemployment rose to 5.8%, as more joined the workforce than found work. For women, participation slipped. Over the year, India’s job mix has skewed further towards services, while manufacturing’s share has diminished—a structural imbalance that narrows the path to strong income growth.

Corporate India is already feeling the squeeze. In the fourth quarter of 2024–25, consumer staples companies are expected to post flat to modest volume growth, with revenues growing only in low-to-mid single digits. Demand from metros and tier-1 cities remains soft. Consumers are still downtrading, gravitating to smaller, cheaper packs. Despite selective price hikes, many firms are unable to offset cost pressures. Additional spending on promotions has only tightened margins.

Taken together, the backdrop for earnings is far from convincing. Fiscal restraint is undercutting demand. Wage growth is stalling. Consumers are cautious. Even if the RBI begins cutting rates, the transmission to real incomes may be slow and limited—especially when wage growth is weak and job creation patchy.

Complicating matters, inflation risks are re-emerging. Core inflation climbed to 4% in February 2025, and the early onset of summer has sparked concerns of a renewed spike in food prices. This may limit the RBI’s room to manoeuvre, reducing the odds of an aggressive easing cycle.

The upshot: the equity rally looks increasingly divorced from economic realities. Without a decisive recovery in household incomes or a revival in fiscal support, corporate earnings could fall short of expectations. Investors banking on monetary policy to do the heavy lifting may soon discover that rate cuts can’t revive demand in a paycheque-starved economy.

*This is the concluding part of a two-part series exploring the disconnect between India’s market rebound and underlying economic fundamentals.