India Inc’s H2 Optimism Meets Relentless Data Headwinds

As India closes its second quarter earnings season, confidence is once again running ahead of the evidence. Forecasts of a sharp earnings resurgence in the second half of the financial year—buoyed by the Reserve Bank of India’s aggressive front-loaded rate cuts, income-tax relief earlier this year, and the GST rate rationalisation—have animated corporate commentary and guidance. Yet the data refuse to fall in line with the upbeat mood. Corporate performance remains muted, the macro signals are soft, and several underlying structural issues continue to sit unresolved.

The numbers themselves strip away any room for interpretation. Over the past 10 quarters, Nifty 50 sales have grown at an average of just 6%, with consumer-facing companies managing 7% revenue growth and a meagre 3% volume increase. Profitability has held up, but largely for the wrong reasons. Companies have relied heavily on cost discipline, tougher supplier negotiations, delayed raw-material pass-throughs, and unusually modest wage increases. These measures have kept margins intact for now, but they carry an obvious risk: by holding back wage growth, they weaken household purchasing power and, with it, the very demand companies are waiting for.

The festive season, usually a reliable test of sentiment, did little to lift the mood. Channel checks across FMCG, apparel, consumer durables and most discretionary categories pointed to soft footfalls and lacklustre secondary sales. The presumed consumption boost from lower GST rates has yet to materialise in any meaningful sense.

Automobiles stood out as the solitary exception: October wholesale dispatches marked their strongest month on record, with passenger vehicles up 17% year-on-year, commercial vehicles 11%, and two-wheelers a modest 3% after several flat months. But this surge appears driven largely by the 10% GST cut interacting with inventory de-stocking, clearance incentives, and clustering of seasonal purchases rather than a genuine cyclical upturn.

Macro Drift
Macro fundamentals mirror this underlying fragility. Retail inflation has fallen to a multi-decade low, yet industrial production remains stuck in the 3–4% range. Nominal GDP growth is languishing in low single digits, and this weakness is fully visible in tax collections. Gross direct taxes rose just 2.8% in the first half, while net collections contracted by 2.8% YoY—far below the 11% target set for the full year. Meeting that target now requires an implausible 18–25% surge in the second half, made even less likely by the revenue impact of GST cuts. A potential shortfall of ₹2.5–3 trillion looms, a gap that may force expenditure reductions that ultimately offset the very consumption stimulus policymakers hoped to generate through indirect-tax relief.

External dynamics provide little help. Global trade momentum, which had shown a brief burst of life after the post-US-election front-loading earlier in 2025, has slipped back again. India’s trade deficit hit a record $41.7 billion in October, driven by a rise in non-oil non-gold imports—up 8.4% year-on-year so far in the face of stiff Chinese competition—while non-oil exports have slowed.

Foreign portfolio flows tell a similar story. Outflows of $23 billion between April and October have dragged FPI ownership in NSE-listed stocks to 16.9%, a 15-year low. Domestic retail participation, long regarded as a reliable buffer, is also losing steam, with equity mutual-fund inflows now 23% below last year’s six-month average.

Market Reality

Yet the market continues to bake in expectations of roughly 15% returns over the coming year, built on the hope of a sharp earnings rebound and a clean valuation re-rating. But the strain between hope and hard numbers is becoming harder to ignore. The Nifty may be up 16% from its April 2025 lows, but it still trades at 22.3x trailing earnings—well below the 26–27x multiples of the pre-COVID boom years. That looks less like a temporary wobble and more like a structural de-rating, possibly shaped by a higher global risk-free rate.

And it is beginning to show. Indian indices have drifted towards the bottom of the global performance tables, a reflection of sentiment outpacing the underlying data.

A large part of the optimism for 2026 rests on the usual props: more rate cuts, a touch of fiscal easing, and the long-awaited revival in private capex. But each of these hopes is far less certain than the bullish narrative makes them sound. The constraints are increasingly hard to ignore. Private investment remains muted despite substantial government spending on infrastructure, reinforcing a simple point the data keeps repeating: supply-side measures cannot substitute for weak demand.

Against this backdrop, the Union Budget for 2026–27 may well become the true turning point. Policymakers have begun to concede that without more direct support to households, a durable recovery will remain out of reach. That, of course, comes with trade-offs: any shift towards consumption support will inevitably squeeze room for capital expenditure.

At a sector level, the picture is uneven. Automobiles may get a little more wind behind them, but reading October’s surge as the start of a broad consumption revival would be a stretch. Expectations for consumer staples and discretionary stocks may need cooling until there is clearer proof of rising wages, a rural recovery, and consistently stronger volumes. Financials, having largely completed the NPA clean-up, are now up against a tougher challenge: there is little room for a re-rating in an economy where credit growth is struggling to pick up meaningfully. The more durable opportunities remain in the same pockets that have held up for a while: defence, the broader digital ecosystem (fintech, e-commerce, quick commerce, data centres), and the energy-transition space across renewables and battery storage.

And so the gap stays where it has been for months. Policy support is being rolled out, sentiment is visibly warmer, and forecasts keep inching up; but the translation into real demand is still weak. Earnings are far likelier to stay in single digits than to make the clean jump into the double-digit trajectory that consensus has already pencilled in. In a slightly de-rating, range-bound valuation environment, market returns may increasingly resemble underlying fundamentals—modest at best—unless unexpectedly positive catalysts emerge.

For now, the swell of optimism remains just that: sentiment moving ahead of substance, while the data continue to caution, firmly and consistently, “not yet.”