Bernstein: India's Growth Story Shaped by Policy Distortions, Not Pure Market Forces

India's recent economic performance is being shaped more by policy interventions than by genuine market-driven productivity gains, according to a new analysis by Bernstein. The report argues that corporate earnings, domestic consumption, and asset valuations are increasingly influenced by regulatory actions, tax incentives, and substantial government transfers.

The analysis highlights a tendency among market observers to celebrate headline growth figures while overlooking structural offsets. It points out that gains in one sector often come at the expense of losses in another, creating an interconnected economic web where enthusiasm for positive data can obscure the underlying causes.

For instance, during the June quarter, earnings for the NSE 200 index grew by 8 per cent, reaching a combined pool of over USD 38 billion. However, this was accompanied by USD 2 billion in losses at oil marketing companies and an estimated USD 8-10 billion impact on the government through excise cuts and increased subsidies for LPG and fertilisers. These transfers supported consumer spending but simultaneously reduced the state's capacity for capital expenditure.

The report uses a simple analogy: if the 100th company in an economy donates USD 50 billion to consumers, who then spend it on products from the other 99 companies, it would be misleading to celebrate the earnings growth of those 99 while ignoring the loss-making donor. The gains and losses are intrinsically linked.

Production Linked Incentive (PLI) schemes are also identified as a key driver of reported profitability in sectors like electric vehicles and electronics manufacturing. Since financial year 2023, the government has allocated over Rs 287 billion under this framework. While the report acknowledges that PLI has supported domestic manufacturing and investment, it cautions that a portion of current earnings is being supported by government incentives rather than by sustainable operating economics. Investors may be capitalising these PLI-supported profits with the same price-to-earnings multiples as recurring earnings, risking the treatment of temporary policy support as permanent earning power.

Further distortions are noted in rural consumption, which remains resilient largely due to direct government transfers rather than productivity gains or farm income expansion. External debt and leveraged currency deposit schemes are also masking underlying pressures on the rupee.

The report concludes with a cautionary note: policy interventions, incentives, liquidity, and human behaviour can temporarily reshape outcomes, making growth seem stronger and risks seem smaller than they eventually prove to be. Distortions rarely feel like distortions while they are occurring; they are often celebrated as evidence of strength, and only with hindsight does it become clear which gains were sustainable and which were merely borrowed from the future.