Economic outcomes are the consequences of economic policies. For more than a year, India has been focusing on implementing growth-stimulating policies and programs. The massive fiscal stimulus provided through big income tax cuts in the 2025 Budget, the rationalization and cuts in GST, the implementation of labor codes and the bold monetary stimulus provided by the RBI, had created a strong pro-growth environment. This pro-growth policy construct is now being taken forward through the Budget 2026.
Budget 2026 paves the way for continuation of growth
The hallmark of the 2026 Budget is that it is growth-oriented and fiscally prudent. The Rs 12.2 trillion public capex allocation for FY27, while targeting a fiscal deficit of 4.3 percent of GDP, is a fine policy blend of growth with fiscal prudence. India’s GDP growth in FY26, has been estimated at 7.4 percent, making India the fastest growing large economy in the world for the fourth year in a row.
On the external front, the much-delayed US-India trade deal materialized with the US agreeing to reduce tariffs on India from 50 percent to 18 percent in return for some concessions made by India. But with the US Supreme Court declaring Trump tariffs as illegal, uncertainty again looms large. Earlier, things moved fast on India-EU trade front with India and the EU signing the so-called ‘mother of all deals’ combining 193 crore people and $27 trillion GDP to form a formidable trade bloc. Before the India-EU trade deal, India had signed trade agreements with the UK, Oman and New Zealand expanding the scope of trade.
What are the likely consequences of these policies and trade deals?
To what extent can growth be accelerated?
Will the stock market respond to the improving macros?
A major recent issue in the Indian economy has been the paradox of ‘strong macros, but weak micros.’ Growth has been impressive during the last five years post-Covid, with average annual GDP growth of 8.1 percent, factoring in the estimated 7.4 percent GDP growth for FY26. This is by far, the best growth performance among the large economies of the world. Yet this impressive growth performance didn’t translate into decent corporate earnings growth. After the initial burst in earnings growth post-Covid, which saw earnings growth of 24 percent CAGR during FY21 to FY24, earnings growth dipped sharply to a mere 5 percent in FY25 and continued to remain modest in FY26, too. The poor earnings growth during FY25 and FY26 can be largely explained by the plateauing of bank profitability, slow growth in IT, and modest growth in FMCG.
Record low inflation impacts nominal GDP
Even though the estimated 7.4 percent real GDP growth has been impressive in FY26, the 50-year low GDP deflator of 0.6 percent restricted the nominal GDP growth to 8 percent. It is important to understand that from the stock market perspective, nominal GDP growth is more important than real GDP growth. The revenue growth, and consequently the profit growth of companies, depend on nominal GDP growth. Therefore, the 8 percent estimated nominal GDP growth of FY26 impacted earnings growth, which, in turn, kept valuations elevated and constrained a rally in the market. This construct of ‘strong macros, but weak micros’ is now changing. This has implications for the stock market.
The Anthropic shock
The ‘Anthropic shock’ came like a bolt from the blue, hugely impacting Indian IT stocks. The IT index lost 13 percent in a fortnight in one of the worst selloffs in the sector. Anthropic’s AI tool Claude Cowork, experts feel, will make many jobs being presently done by Indian IT companies redundant. Even in the midst of this existential threat, there are collaborative opportunities as evidenced by Infosys collaboration with Anthropic. Clarity is yet to emerge on the prospects for the Indian IT industry.
Strong macros and improving micros
Even in the midst of the threat to Indian IT industry, there are positive developments for the Indian economy and corporate sector. The trade deals with EU, UK etc. bode well for export promotion, going forward. The bright macro construct continues. Aided by the fiscal and monetary stimulus of 2025, the growth-oriented and fiscally prudent Budget of 2026, the trade deals struck with EU and others, the GDP growth in FY27 can rise to above 7 percent. More importantly, with inflation expected to rise to about 4 percent in FY27, the nominal GDP growth can easily rise to about 10.5 percent, thereby favorably impacting corporate earnings growth. Corporate earnings have the potential to rise to about 15 percent in FY27. FIIs are likely to turn buyers in India in response to the improving fundamentals. More importantly, the dollar depreciation of about 10 percent during the past year has significantly eroded the real returns of foreign investors. When the market starts discounting these factors, a rally is likely. However, it would be unrealistic to expect a ‘V’ shaped rally in the market. Valuations are not attractive enough to trigger a smart, sustained rally. Therefore, expect decent, not spectacular, returns in the rest of 2026. Since the longer-term prospects are, indeed, bright, remain invested and continue to invest systematically.
