Hope Fading, Prices Rising

The Reserve Bank of India (RBI) recently released the results of its latest forward-looking surveys (May 2026 Round). Based on the feedback received from respondents, the survey results provide important insights with respect to consumer confidence — both urban and rural — inflationary expectations and economic growth expectations from professional forecasters.

Urban Consumer Confidence – A third successive decline

Consumer confidence for the current period declined for the third successive round, with the Current Situation Index (CSI) falling sharply to 90.7 from 95.7 in the previous round. A value below 100 indicates a state of pessimism, and on this measure, urban households are now firmly in negative territory on their assessment of present conditions.

The deterioration is broad-based. Perceptions on the general economic situation worsened considerably — the net response on economic conditions fell by 7.9 points to -16.5, as nearly 48% of respondents felt conditions had worsened compared to a year ago. Sentiment on employment also deteriorated sharply, with the net response on employment falling to -14.4 from -9.1 in the March 2026 round. Income perceptions barely stayed positive, with a net response of just 0.9.

The forward-looking Future Expectations Index (FEI) also weakened, dropping 1.5 points to 118.7 — the lowest reading since September 2023. While the index remains in optimistic territory (above 100), the trajectory is concerning. Households have revised down their expectations on economic situation, employment, income and spending across both time horizons. The waning of confidence is primarily driven by ebbed sentiment on discretionary expenditure, with non-essential spending expectations falling sharply: the net response on future non-essential spending collapsed to 15.9 from 21.1 in the previous round.

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Rural Consumer Confidence – Similarly Strained

Rural confidence tells a similar story. The Current Situation Index (CSI) for rural households fell further to 95.2, declining for the second successive round from a recent peak of 100.9 in September 2025 — a fall of nearly 6 points over three survey rounds. Current perceptions on the economic situation moved into negative territory (net response of -2.5), and employment sentiment also turned negative (-1.2). Income perceptions remain weak at -5.8.

The Future Expectations Index (FEI) for rural households fell sharply to 119.3 from 125.1 in March 2026, with worsening conditions across all parameters except prices. Forward expectations on income fell to a net response of 38.9, down from 45.7. Spending expectations also softened notably, with non-essential spending expectations falling to a net response of just 42.6, from 59.5 in the previous round — a significant pullback suggesting rural households are tightening their belt.​

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Household Inflation Expectations – Rising Sharply

Urban households’ current median inflation perception jumped by 60 basis points (bps) to 7.8% compared to the previous round. Inflation expectations for the next three months and one year both edged up by 80 bps and 50 bps respectively, reaching 9.3% for both horizons. The proportion of respondents anticipating higher prices inched up across all product categories, with food products, non-food products and housing all seeing increased price pressure expectations.

The rural picture is consistent. Median inflation perception among rural households rose by 30 bps to 5.9%, and one-year-ahead inflation expectations climbed 40 bps to 7.2%. Across age and occupation groups, the upward drift in inflation expectations is widespread — particularly notable among retired persons, who now expect inflation of 8.6% over the next year.

Professional Forecasters – GDP revised down, inflation revised up

GDP: Real GDP is now expected to grow at 6.5% in FY27, revised down by 40 bps from the previous round. For FY28, the forecast stands at 6.9%, modestly lower by 10 bps. Forecasters have assigned the highest probability to GDP growth in the 6.5-6.9% range for FY27, while for FY28, the modal outcome is also the same band. Annual growth in real PFCE and GFCF for FY27 are expected at 6.8% and 6.5% respectively, with GFCF revised down by 60 bps — a signal of tempered capital formation expectations.

Real GVA growth for FY27 is pegged at 6.6%, with services (7.7%) and industry (6.8%) doing the heavy lifting, while agriculture is expected to contribute a modest 2.4%.

Inflation: This is where the story turns uncomfortable. Annual headline CPI inflation is expected at 4.9% for FY27 and 4.5% for FY28. The quarterly path, however, reveals a more concerning picture: CPI is forecast at 4.0% in Q1 FY27, rising to 4.9% in Q2, accelerating to 5.5% in Q3, and easing only marginally to 5.2% in Q4. Core CPI (excluding food and fuel) is expected to rise from 3.9% in Q1 to between 4.4-4.7% through the rest of the year.

WPI inflation forecasts have been revised up sharply. WPI All Commodities is projected at 8.9% in Q1 FY27, 9.0% in Q2, before moderating to 7.9% in Q3 and 6.5% in Q4.

External Sector: Merchandise exports are expected to grow 5.0% in FY27 and 4.7% in FY28 in US dollar terms. Imports, however, are forecast to grow much faster at 10.5% in FY27, before normalizing to 4.6% in FY28. This asymmetry pushes the current account deficit (CAD) to 2.1% of GDP in FY27 — a significant deterioration of 60 bps from the previous round’s estimate — narrowing to 1.2% in FY28. The median USD/INR rate is pegged at around 95.4-96.6 across the quarters of FY27, with crude oil (Indian basket) expected in the $85-105/barrel range across quarters.

The takeaway

Taken together, the May 2026 round of RBI’s surveys paints a picture of an economy that is growing at a reasonable but moderating pace, against a backdrop of rising inflation pressures and rapidly eroding consumer confidence — across both urban and rural India.

The triple squeeze is hard to miss: households feel worse off today than a year ago, they expect prices to be significantly higher a year from now, and they are pulling back on discretionary spending. Professional forecasters have simultaneously marked down growth and marked up inflation. The widening CAD and sharp upward revision in WPI forecasts add to the headwinds.

Hope was the dominant sentiment in previous survey rounds. In this one, it is fading. The optimism that characterized forward expectations — buoyant FEI readings, resilient income outlook, strong discretionary spending intentions — is giving way to something more sober. If the quarterly CPI trajectory plays out as forecast, with inflation touching 5.5% in Q3 FY27, the RBI will face an uncomfortable policy tradeoff, even as growth edges lower.

For investors, the signposts are clear enough: demand recovery may disappoint consensus, margin pressures from higher input costs are likely to persist, and the consumer staples vs discretionary divide may widen further. The surveys may not move markets directly, but they sharpen the lens through which to read the earnings season ahead.

 

India’s fading premium

The 3Ds: A Framework That Needs Revisiting

In a post in May 2017 (see here), I had argued that Democracy, Demography, and Demand — the 3Ds that global investors had long cited as India's structural pillars — were in fact the key challenges for sustainable economic growth, not straightforward advantages. I had warned then that "pseudo-socialist and quasi-feudal" political incentives often led to capital misallocation, that young demography uncoupled from skill formation was a liability not an asset, and that aspirational consumption driven by political promises rather than income growth was neither desirable nor sustainable.

Nine years later, that assessment has aged uncomfortably well.

The 3Ds remain the rhetorical foundation of every India pitch deck. But in practice, each of the three pillars has shown meaningful stress:

Democracy: Stability without predictability

The political stability that investors valued has been real. But stability of government and predictability of policy are different things, and the distinction matters enormously for long-term capital allocation.

Policy unpredictability — retroactive regulatory changes, sudden sectoral interventions, judicial reversals of contracts — has become a recurring theme in India's investment narrative. Enforcement agencies, whose independence from political direction is a minimum requirement for credible rule of law, have been perceived by many foreign investors as instruments of selective pressure rather than neutral arbitration. Whether or not this perception is entirely fair, it exists, and perceptions drive capital flows.

The consequences are visible in the data. India's share of global market capitalization has fallen to 3% in May 2026 — a 50-month low, down from a peak of 4.6%. Foreign portfolio investors have recorded outflows for three consecutive months, with CY26 YTD outflows from Indian equities totaling $25.9 billion. Large-scale FDI — the kind that reflects genuine confidence in contract enforcement and regulatory stability — has not arrived in the volumes the India growth story would logically support.

The weak contract enforcement mechanism and the perceived misuse of enforcement agencies may not be the headline reasons cited in FII exit reports. But they are the background conditions that make it easier for a global portfolio manager to reallocate to Korea or Taiwan when those markets begin to offer more compelling near-term returns. The institutional trust that transforms a structural growth story into sustained capital inflows requires more than a good narrative. It requires consistent, rule-bound behavior over many years. That work remains incomplete.

Demography: Dividend deferred

India has the world's largest young population. This is an extraordinary potential asset. It is also an extraordinary potential liability if not channelized properly — a point I made in 2017 & 2019 (see here) and which has not become less true in the interim.

The demographic dividend requires a specific set of preconditions: quality education at scale, practical skill formation aligned with the labour market, employment generation that absorbs new entrants faster than the workforce grows, and social infrastructure — healthcare, housing, transport — that keeps a young population productive rather than frustrated.

India's record on these preconditions has been mixed. The headline growth in formal employment has not kept pace with the scale of the young population entering the labour market each year. Real wages for a large segment of the working population have not kept pace with food and services inflation, eroding purchasing power and suppressing the consumption-led growth that was supposed to be the demand side of the demographic story.

The rise of aspirational consumption driven by credit and political transfers — rather than genuine income growth — has created demand that is more fragile than it appears. When that fragility is tested by food inflation, fuel price hikes, or job uncertainty, the consumption numbers disappoint. Which is precisely what has been happening.

Demand: The engine that stuttered

The third D — Demand — is where the recent underperformance is most directly visible in corporate earnings.

The Nifty 50 registered only 5% EPS growth in FY26, following a 16%-plus CAGR in the five years from FY20 to FY25. The 4QFY26 result season marked the eighth consecutive quarter of single-digit earnings growth for the Nifty since the pandemic era.

The Consumer sector P/E, at 38.5x, sits at a 10% discount to its 10-year average. FMCG companies are taking calibrated price hikes, reducing grammages, and cutting marketing spend — the classic playbook of businesses navigating margin pressure from both sides. Companies need crude to remain below $90/bbl to protect margins; it is currently running at $106/bbl.

IT — historically the sector that combined India's demographic and educational advantages with global demand — has delivered a structural rather than cyclical disappointment. Technology trades at 16x, a 26% discount to its 10-year average. Infosys guided for 1.5-3.5% constant currency revenue growth for FY27. HCL Tech guided 1-4%. AI-led pricing pressure, early signs of revenue deflation in legacy services, and the recognition that previously assumed-stable revenue pools may be "deflatable" have reframed the sector's growth narrative. The dividend yield for technology has risen to 4.7% — the market's way of saying it expects income, not growth, from these businesses going forward.

Private sector capex — the investment cycle that was supposed to follow the post-COVID infrastructure push — has not materialized with the breadth and depth anticipated. Corporate balance sheets are healthier, but the willingness to commit to large expansionary investments in an environment of demand uncertainty and elevated input costs is limited.

The fourth D that was missing: Depth

There is a fourth argument that has historically been made for India's valuation premium — the argument of market depth and breadth. India has one of the largest equity market ecosystems among emerging markets, with hundreds of listed companies, a developed institutional framework, robust retail participation through the SIP culture, and a regulatory infrastructure that compares well against peers.

This argument has real merit. The domestic institutional base — DII inflows of $41.4 billion in CY26 YTD — has been the primary shock absorber in a year of intense FII selling. Without this structural domestic bid, the market's correction would have been considerably deeper. The SIP culture is genuinely transformative and represents a democratization of equity ownership that has few parallels in emerging market history.

But the depth argument has a counterweight that is harder to dismiss: only a handful of Indian companies have achieved genuine global scale and performed consistently across cycles. The ambition to be a technology and innovation powerhouse has not translated into companies that compete at the frontier globally. India seems to have lost ground in the race for new technologies — semiconductors, AI infrastructure, advanced manufacturing — that are reshaping where global capital flows. The result is material liquidation of foreign portfolio and private equity investments, as global allocators redirect capital toward markets where those technology bets are being won.

India's equity market is deep in breadth but not yet in the kind of globally competitive corporate quality that sustains a premium over decades. Until that changes, the premium will remain contested.

The honest assessment

The two-year time correction in Indian equities is not a market failure. It is the market performing its basic function — pricing out a premium that was built on expectations that were not met.

The 3Ds that justified India's premium were not fictional. Demographics remain real. Domestic demand potential remains real. The political stability that enables long-term planning remains intact. The institutional market infrastructure is better than it has ever been.

But structural potential is not the same as structural delivery. The gap between what India's story promises and what it consistently delivers — in earnings per share, in globally competitive companies, in predictable regulatory environments, in real income growth for the median household — is the gap that the derating is closing.

Investors who bought the India story at 25x or 28x forward earnings were paying for a future that is arriving, but later and more modestly than they assumed. That is not a new lesson. It is the same lesson that Indian equity markets have administered, periodically and without apology, to those who confuse a compelling narrative with a guaranteed outcome.

The current period of underperformance may be nearing its end. Valuations are more reasonable. The domestic institutional base is structurally supportive. The FY27 earnings cycle, if it delivers, could re-establish the growth narrative that justifies a premium over peers.

But the condition of a sustained return to premium is clear: India must begin delivering on the scale that the narrative has always promised. Companies of genuine global quality. Policy environments that attract rather than frighten long-term capital. Real income growth for the majority, not just the top decile.

Until those conditions are met, the premium will remain, at best, moderate.

And moderate is not what India's story was supposed to be.

Also read

What’s bothering Indian equity markets

Overcome the inertia first, rest will follow

Democracy, Demography and Demand

New 3Ds - disappointment, dismay and disillusion

Demographic accountability

What’s bothering Indian equity markets

There is a particular kind of pain that is harder to bear than an outright crash. It is the slow, grinding disappointment of a market that refuses to go anywhere — up or down — for so long that investors begin to wonder whether they have misread something fundamental. Indian equities have been delivering precisely that experience for the better part of two years.

For the 24 months ending 5th June 2026, the Nifty 50 and the Nifty Smallcap 100 have yielded essentially nothing — zero return, net of the daily noise. The Nifty Midcap 100 has managed a modest positive, but even that flatters a journey that included a sharp crash and an equally sharp recovery in the intervening months, implying a CAGR of less than 5% for the period. This is what a time correction looks like. Not a bear market. Not a recovery. Just stagnation, dressed up in daily volatility to keep you from sleeping.

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The global context makes the domestic picture worse. In a period when most of the world's major equity markets have delivered strong returns — Korea up 93% in USD terms year-to-date, Taiwan up 55%, Japan up 29%, MSCI EM up 25% — Indian equities have fallen 15% in USD terms in 2026 alone. And on the ten-year measure that strips out shorter-term noise: MSCI EM has now outperformed MSCI India with a 10-year CAGR of 8.1% versus India's 7.4%.

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For an index that has historically commanded a 73% P/E premium over EM — a premium built on three decades of structural optimism about India's potential — this is a significant and humbling reckoning.

The valuation picture

Before asking why this has happened, it is worth being precise about what has happened to valuations.

As per the Motilal Oswal Bulls & Bears Valuations Handbook for June 2026:

·         The 12-month forward P/E of the Nifty 50 stands at 18.6x, against a 10-year average of 21x — an 11% discount to history.

·         The 12-month forward P/B ratio is 2.7x, against a 10-year average of 2.9x — a 5% discount.

·         India's market cap to GDP ratio has corrected from 129% in March 2024 to 115% in March 2026. Still above the long-term average of 87%, but no longer in the exuberant territory of 2024.

·         The PE premium of MSCI India over MSCI EM has collapsed from a historical average of 73% — and a peak of 150% in November 2022 — to a moderate 17% as of end-May 2026.

These are not crisis-level numbers. The Nifty is not cheap in any absolute sense. But the direction is unambiguous: the premium that India has historically commanded over its peers is being systematically stripped away.

It is time to ask the question; we have avoided asking for a long time — is the India premium still deserved?

…to continue tomorrow

India markets - two extremes, and something in the middle

India's consumer economy is not a single story moving in one direction. It is at least two stories moving in opposite directions simultaneously. Investors who treat it as one thing are likely to be surprised — in both directions. Those who understand the split, and position accordingly, may find it one of the more durable structural themes of this decade.

Walk into any grocery store in a middle-class neighborhood today and ask the owner what is selling. The answer is likely to surprise you. Cheaper rice. Loose dal instead of packaged. The economy brand of oil, not the one they used to buy. In some cases, smaller quantities of everything.

Now walk into a luxury car showroom in the same city. Waiting lists. New models selling above sticker price. Customers paying for options they did not even know existed six months ago.

Both of these things are happening in India right now. At the same time. In the same cities. And they are not contradictions — they are two sides of the same economic reality.

Why many Indians are buying less, and cheaper

The idea that Indian consumers prefer low prices is not new. It is often described as a cultural trait — as if thrift were somehow in the national character. That framing is misleading. Indian consumers are not cheap by nature. They are rational. When budgets are tight, they make trade-offs. When budgets loosen, they upgrade — fast.

What is happening right now is that budgets are tight. And for many households, they are tighter than they were three years ago.

Food prices have risen sharply. A kilogram of tur dal that cost Rs. 80 a few years ago now costs close to Rs. 160 in many markets. Edible oil prices remain elevated. Wheat flour costs more. These are not luxuries — they are the building blocks of everyday meals for most Indian families.

At the same time, wages for a large portion of the working population have not kept pace. Real wages — what your salary actually buys after accounting for inflation — have fallen for many workers in the informal economy. The result is a household that earns roughly the same in rupees but can buy meaningfully less.

The response is predictable and rational: buy cheaper. Buy less. Buy local brands instead of national ones. This is what economists call downtrading, and multiple grocery retailers I spoke with in recent months confirmed it is happening in staples across the board — pulses, oils, rice, flour, and even basic hygiene products.

The apparel market tells the same story. Footfall at economy chains like Zudio and Reliance Trends has risen noticeably. Budget online platforms like Meesho have grown into very large businesses by serving exactly this segment of price-pressured shoppers, primarily in smaller cities and towns.

One honest caveat: my evidence here is largely qualitative. Retailer conversations, observed footfall, and reported trends from FMCG companies. Published household consumption data with sufficient granularity and recency is hard to come by in India. The direction of the trend feels clear. The precise magnitude is harder to pin down.

A middle lane that actually works — sometimes

Before making the case for polarization, it is worth pausing on a trend that complicates the story.

Uniqlo and Miniso — Japanese and Korean retail chains — have found a growing and loyal customer base among younger, urban Indians over the past few years. Neither is cheap in the way Zudio is cheap. Neither is premium in the way a luxury brand is premium. They sit in the middle, and they are doing well.

What they offer is a specific combination: consistent quality at a price that feels fair. Not the lowest price. Not an aspirational premium. Just reliable value.

Indian FMCG companies have cracked versions of this in the past. Some detergent and personal care brands built large businesses by offering clearly better quality than the cheapest option, without asking consumers to stretch to a premium price. That formula works — but it is operationally very hard to sustain, and it requires genuine product differentiation, not just positioning.

The honest conclusion here is that the middle is not dead. It is just difficult. Companies that can credibly deliver quality at a fair price can survive and grow there. Companies that are merely positioned in the middle — without a real quality advantage — are the ones getting squeezed. The distinction matters for investors.

Why the rich are spending more, and what it tells us

At the other end of the market, something very different is happening. Premium and luxury goods — alcohol, high-end home fittings, luxury cars, watches, premium apartments — are selling well. In some categories, they are selling better than ever.

The explanation is straightforward. Wealth in India has become more concentrated at the top over the past decade. A relatively small number of households has seen very large gains in income and asset values. This group can afford — and now routinely buys — things that were once considered out of reach for all but a handful of Indian consumers.

In volume terms, this group is small. In value terms, it is large enough to move entire categories. A luxury goods business that captures even a modest share of this segment can generate revenues and margins that a mass-market company with ten times the customer base would struggle to match.

This trend is real and it is likely durable, for a simple reason: nothing in the near-term policy or economic outlook suggests a reversal of the wealth concentration that is driving it. Barring a significant redistribution shock — which is not visible on the horizon — the premium end of the market will continue to grow.

The uncomfortable corollary: this trend is a direct product of inequality. The premium boom and the downtrading squeeze are not separate phenomena. They are two consequences of the same underlying dynamic — income growth that has been heavily skewed toward the top. Investors can choose to benefit from this. They should also be clear-eyed about what they are investing in.

The infrastructure problem: same disease, different patient

The tendency to choose the lowest price regardless of quality is not confined to household shopping. It appears to have taken root in how public money gets spent on infrastructure.

Bridge collapses. Roads that develop potholes within months of opening. Transformers that fail soon after installation. These are not one-off accidents. They form a pattern — and the pattern points toward a procurement system that consistently rewards the lowest bid, without adequately pricing in quality, durability, or execution risk.

India's public infrastructure tendering is dominated by L1 — lowest-bidder — frameworks. The political and administrative logic is understandable: it minimizes the appearance of favoritism and is easier to defend against audit objections. But the economic outcome is predictable: contractors win by cutting costs, and quality is often the first casualty.

For investors in construction and infrastructure companies, this creates a specific and underappreciated risk. Companies that depend heavily on public works contracts face perpetual margin pressure, because winning business requires bidding low. Execution risks are elevated because their suppliers are also bidding low. And as public scrutiny of infrastructure quality increases, so does the liability exposure when things fail.

This is not a reason to avoid the sector entirely. Some infrastructure businesses are well-insulated: those with private-sector clients who price for quality, those with long-term annuity concession models, and those offering specialist technology that faces less direct price competition. But the broad category of public-works contractors deserves a harder look than most investors give it.

What this means for investors: Two viable ends, a difficult middle

Let me try to state the investment implications as plainly as possible.

In the consumer space:

The market is splitting. At the mass end, volume and distribution are what matter — brands and platforms that can reach the largest number of price-sensitive buyers efficiently. At the premium end, pricing power and brand credibility are what matter — businesses that serve customers who will pay more for something they believe is genuinely better.

The difficult position is the middle. Not impossible — as Uniqlo and a handful of Indian FMCG brands demonstrate — but hard to sustain without a real quality advantage. Mid-market companies that are positioned in the middle without owning that quality advantage are vulnerable.

A concrete but incomplete shortlist of where to look: mass-market FMCG with strong rural distribution; economy retail formats; budget digital commerce platforms; premium alcohol; high-end home improvement; wealth management and financial services catering to affluent households. This is not a buy list — it is a directional filter.

In the infrastructure space:

Be selective. Avoid companies whose revenues are overwhelmingly dependent on government construction contracts won through lowest-bid tendering. Prefer companies with private-sector client exposure, annuity-based revenue models, or genuine technological differentiation. The risk in public-works contractors is not obvious from their order books — it shows up in margins, execution delays, and the occasional catastrophic quality failure.

The caveat

The downtrading evidence is qualitative. Retailer conversations and observed footfall are useful signals, but they are not a substitute for hard data. The direction looks right. The scale is uncertain.

The bifurcation thesis has counter-examples. Several respected Indian consumer companies — Titan, Havells, Asian Paints, Marico — have built enduring businesses in spaces that are neither pure mass nor pure luxury. They complicate the avoid-the-middle argument and deserve acknowledgment.

The infrastructure investment call needs refinement. The sector is large and varied. Painting it with a single brush is too broad. The caution applies most directly to L1-driven government contractors. It does not apply equally to the whole sector.

None of these caveats invalidates the central observation. But they are a reminder that what follows from field observation and qualitative reasoning is a hypothesis to investigate, not a conclusion to act on without further work. 

Exercise caution in the peace trade

Markets are growing complacent

With each passing day, global markets appear to be becoming increasingly sanguine about the situation in West Asia. A growing chorus of analysts and business leaders are expressing confidence that the conflict will wind down soon, and that energy markets will revert to their pre-war equilibrium within a matter of months. Some have gone further, predicting that energy prices could settle at materially lower levels than those that prevailed before hostilities began — a scenario premised on the easing of American sanctions on Iranian and Russian crude, alongside a ramping up of production by Venezuela and the UAE, which now operates outside its OPEC quota constraint.

I would suggest investors approach this “peace trade” with considerably more caution than current sentiment suggests. The probability is high that markets have already largely discounted the peace dividend — including the normalization of commercial traffic through the Strait of Hormuz. Positioning for a windfall that is already in the price is not a trade; it is a hope.

Energy prices will not snap back instantly

Even if the Strait of Hormuz were to reopen tomorrow, a return to pre-conflict energy price levels is far from assured. The physical infrastructure damaged during the conflict may take several months to restore to operational pre-war capacity. Beyond the supply mechanics, the fiscal break-even levels for crude oil in several Gulf states — notably Saudi Arabia and Bahrain — may have risen materially during the conflict period, driven by expanded defence and welfare commitments. Producers at elevated break-evens have little incentive to flood the market.

For the world’s major energy importers — concentrated in Asia and Europe — a sustained period of higher energy costs leaves a lasting imprint on the terms of trade, keeping inflationary pressures elevated long after a formal truce is announced. The inflationary overhang, compounded by the fiscal pressures that governments have taken on to cushion the economic blows of war, has pushed the timeline for meaningful policy rate cuts further into the future.

Bond markets are, accordingly, struggling. A truce in West Asia is unlikely to offer them immediate relief. For India in particular, the case for near-term rate hikes — rather than cuts — may in fact strengthen in the months following any ceasefire, as the rupee finds its new level and imported inflation feeds through domestic price indices.

Equities: Resilience has limited the upside

The behavior of risk assets throughout the conflict has been, in a word, surprising. Equity investors’ appetite for risk has held up with a tenacity that few would have predicted when hostilities began. That resilience is admirable from a behavioral standpoint, but it carries a practical cost: it has substantially compressed the room available for a dramatic post-truce rebound in equities and other higher-risk instruments.

In my view, returns in the post-truce environment will be primarily a function of earnings growth rather than multiple expansion. A broad macro trade — the kind of re-rating that follows a genuine risk-off episode — is unlikely to materialize in the near term. The case for an immediate PE re-rating is simply not there.

The more productive tactical opportunity is likely to emerge from sector rotation rather than from an index-level trade. Sectors that have been beaten down during the conflict — IT services and FMCG chief among them — may outperform the currently favored themes: power infrastructure, data centers, and defence. However, this rotation trade is not without risk: IT services faces a structural headwind from AI-driven efficiency pressures on technology budgets, while FMCG grapples with volume growth in a consumer environment compressed by negative real wages.

India’s problems run deeper than the war

This brings me to the more uncomfortable argument. A meaningful segment of investors appears to believe that India’s market difficulties are substantially, if not primarily, a product of the West Asia conflict, and that resolution of that conflict will provide a correspondingly powerful tailwind. I think that view is mistaken, and potentially costly.

India is contending with a multitude of structural problems that will not dissolve with a ceasefire. On the macroeconomic front: the current account deficit has widened under the weight of elevated energy import costs; net FDI has turned negative; FII outflows have been persistent and large over multiple years; the rupee has been among the worst-performing major currencies; and the government’s fiscal space is contracting simultaneously from multiple directions — expanded defence spending, subsidy commitments, and weakening tax revenue in a slowing economy.

The demographic picture adds a longer-horizon concern. India’s Total Fertility Rate has remained below the replacement threshold of 2.1 for five consecutive years, standing at 1.9 in 2024. The urban TFR has fallen to 1.5 — a level comparable to ageing Western European societies. The window for harvesting a demographic dividend, in the economically dominant urban half of the country, has effectively already closed. This is not a cyclical problem that a peace settlement will address.

The climate emergency compounds these pressures. In April and May 2026, all fifty of the world’s hottest cities were located within India on multiple days. Agricultural output is under threat. Power grids are strained. Water scarcity has intensified. These are not episodic shocks; they are structural forces that will weigh on productivity, public finances, and social stability for the foreseeable future — independent of what happens in the Strait of Hormuz.

There are governance and institutional dimensions as well. Investor confidence in the consistency of regulatory enforcement, the independence of the judiciary, and the quality of economic policymaking has been eroding. Corporate India, despite tripling net profits between FY21 and FY25, has cut private investment as a share of GDP to a twenty-year low, with promoters opting to accumulate cash, establish family offices, and increase overseas allocations rather than deploy capital productively at home. This is not the behavior of a business community that is broadly optimistic about the domestic investment environment.

Conclusion: Price in the complexity

The peace trade is a legitimate market theme, and a ceasefire in West Asia would unquestionably remove a source of uncertainty that has weighed on global sentiment. But investors who expect that outcome to resolve India’s investment challenges are, in my view, underestimating the complexity of what lies underneath.

The macro headwinds are structural, not cyclical. The demographic dividend is narrowing. The climate crisis is intensifying. Institutional confidence is fragile. Corporate investment remains suppressed. A truce will not, by itself, resolve any of these. Position size your peace trade accordingly.

और भी दुख हैं ज़माने में मोहब्बत के सिवा

राहतें और भी हैं वस्ल की राहत के सिवा

— Faiz Ahmed Faiz

Hope could drive you insane

In a striking illustration of India's deepening climate emergency, on multiple days in April and May 2026, all fifty of the world's hottest cities were located within Indian borders — a record corroborated by real-time temperature tracking platform AQI.in. Uttar Pradesh accounted for more than half of those cities, with temperatures hovering between 43°C and 44°C across scores of districts, while parts of Maharashtra's Vidarbha region breached 46°C.

Yet searing temperatures are only one dimension of a multi-front crisis. Large swaths of the country are simultaneously contending with devastating heatwaves, violent sandstorms, acute water shortages, and frequent power outages. A severe wildfire has raged through Uttarakhand. Crops are withering under abnormally high temperatures. Livestock are succumbing to heat and drought. Ordinary citizens are suffering heat-related illnesses alongside water and electricity shortfalls. And the broader economy is straining under high inflation, widening fiscal and trade deficits, a depreciating currency, and rising bond yields.

Compounding the material hardship is a crisis of reputation and governance. Avoidable foreign policy missteps, unpredictable economic decisions, a chronic accountability deficit, and systemic mismanagement have eroded India's standing both at home and abroad.

Warnings Ignored

None of this should have come as a surprise. The India Meteorological Department (IMD) issued advance warnings of above-normal summer temperatures months before the season began. Global climate agencies had been signaling the likelihood of a strong El Niño event — and potentially a super El Niño — since at least February of this year. Heatwaves, water scarcity, wildfires, and grid overload are precisely the contingencies that governments and disaster-management authorities should have anticipated and prepared for in advance.

War clouds had been gathering over West Asia for several years. Energy-price shocks, inflationary pressures, and supply-chain disruptions were the very minimum that any forward-looking administration should have modelled and mitigated against.

None of this preparatory work appears to have been done. Rather than acknowledging the gathering risks, the government remained in denial — and, according to multiple reports, actively disseminated reassuring but misleading information to the public until state elections had concluded.

An existential threat demanding existential urgency

The stakes extend far beyond any single political cycle. Some credible research published recently projects that heat-related mortality in India could escalate several-fold under high-emissions scenarios in the coming decades. One study estimates that annual heat deaths across South Asia could exceed 400,000 by 2045, with India bearing the heaviest burden. Since 1990, one quarter of all heat-related excess deaths globally have occurred in India.

Meanwhile, India's Himalayan glaciers are retreating at an alarming rate. Studies by the Indian Space Research Organisation (ISRO) indicate that approximately 75% of Himalayan glaciers are in retreat, and research from the University of Leeds found that Himalayan ice loss over recent decades has occurred at a rate ten times higher than the long-run historical average. Major river systems — the Ganga, Yamuna, Indus, and Brahmaputra — face long-term threats to their base flows, imperiling agriculture, drinking water, and hydroelectric power for hundreds of millions of people.

A government genuinely alive to these existential stakes would be mobilizing resources, reforming institutions, and communicating urgently with citizens. Instead, the policy agenda has featured landmark statue construction and road-building projects of questionable strategic priority.

The youth crisis: Anxiety, aspiration, and despair

The mismanagement of competitive and school examinations has added yet another dimension to the crisis. The cumulative effect on young people is measurable. According to data from the National Crime Records Bureau (NCRB), over 40 per cent of all suicides in India are committed by those below the age of 30 — a share that represents roughly double the global average for that age cohort, according to experts at AIIMS. In 2022, 1.71 lakh suicides were recorded in India; among the young, this figure marked a 27 per cent rise compared to 2018.

The broader social picture is equally sobering. Affluent Indians are increasingly seeking to emigrate or to secure foreign residency for their children. Those without such options face a system that offers diminishing returns on effort and aspiration.

Investor confidence is wavering. Entrepreneurs are deferring capital allocation. The economic dynamism that India's demographic dividend was supposed to generate remains frustratingly latent.

The danger of hope deferred

An overwhelming majority of Indians appear to be sustaining themselves on hope — the expectation that conditions will improve, that governance will strengthen, that the arc of the country's trajectory bends, eventually, toward better days.

That hope is neither irrational nor unwarranted. India possesses extraordinary reserves of talent, entrepreneurship, and resilience. But hope, unaccompanied by accountability and action, is a fragile vessel.

As the character Red — played by Morgan Freeman in The Shawshank Redemption — observed with characteristic economy: “Hope is a dangerous thing. It can drive you insane.” The line resonates differently when the hope in question is that of a nation waiting for its institutions to deliver on their most basic obligations.

India's crises — climatic, institutional, and social — are not destiny. They are the cumulative product of choices: choices about what to prioritize, what to acknowledge, and whom to hold accountable. Different choices remain possible. But they require, first, an honest reckoning with the scale of what is already unfolding. 

Demographic Dividend on Borrowed Time

The 2024 Sample Registration System (SRS) Statistical Report, released by the Office of the Registrar General & Census Commissioner of India, confirms with little ambiguity what we have been anticipating for some years: India is no longer a young, fast-multiplying nation racing toward a demographic windfall. It is a country in the middle of a structural demographic pivot, one that carries serious implications for growth, fiscal policy, and market valuations. The data covers the calendar year 2024 and was published in May 2026.

I had highlighted this trend previously in April 2022 (Gorillas in the Room – 2) and September 2025 (End of demographic dividend approaching fast). The 2024 SRS report is not a reversal of those trends. It is their continuation and, in several respects, their acceleration.

The much-discussed demographic dividend was always a time-limited window. The 2024 SRS data suggests that the window is not merely closing — in the urban and more prosperous half of India, it has already closed.

The headline: TFR below replacement for the fifth consecutive year

India's Total Fertility Rate stood at 1.9 in 2024, unchanged from 2023, and below the replacement threshold of 2.1 for the fifth consecutive year. The stubborn persistence at this level — neither recovering toward replacement nor diving sharply lower — should not be mistaken for stability. It signals that sub-replacement fertility has now become the structural baseline of the Indian demographic story, not a passing episode.

1.9 National TFR

1.5 Urban TFR

2.1 Rural TFR

2.9 Bihar (highest)

1.2 Delhi (lowest)

 

The rural–urban gap deserves attention. A rural woman in India still has, on average, one more child over her lifetime than her urban counterpart. Rural TFR is exactly at replacement (2.1) while urban TFR has dropped to 1.5 — a level comparable to several ageing European societies. This matters because India’s economic, fiscal, and political weight is increasingly urban, and the urban population is the one that produces the skilled workforce, pays the bulk of direct taxes, and drives consumption of discretionary goods. An urban TFR of 1.5, sustained over years, implies that the productive urban cohort is not replacing itself.

It is also important to note the demographic inequality implicit in these numbers. Bihar, with a TFR of 2.9, is still growing fast. It is also the state with the highest poverty rate, the lowest per-capita income, and among the weakest human development indicators. The richer and more economically dynamic states — Delhi (1.2), Kerala (1.3), Tamil Nadu, Maharashtra, Karnataka — are all deeply sub-replacement. This means that India’s future population growth, such as it is, will be concentrated in its most economically backward regions. The 2022 post noted this pattern in NFHS-5 data. The 2024 SRS confirms it is not correcting.

Birth rate and death rate: diverging slowly, not dramatically

The Crude Birth Rate (CBR) declined to 18.3 in 2024 from 18.4 in 2023, continuing a steady multi-year slide (it was 20.0 in 2018). Urban birth rate has dropped sharply to 14.7 while the rural rate, at 20.2, remains considerably higher. Among larger states, Bihar (26.8) and Uttar Pradesh remain at the top end; Kerala (11.1) sits near the bottom.

The Crude Death Rate (CDR) held at 6.4 in 2024 — the same as in 2023. Chhattisgarh continues to have the highest CDR (8.4) and Delhi the lowest (4.5). The post-COVID stickiness in the death rate deserves a note: the overall mortality rate remains above pre-pandemic levels, even as birth rates have fallen further. The gap between births and deaths — the natural growth rate — is therefore narrowing faster than either indicator alone might suggest.

Infant mortality: improving, but the state-wise disparity remains stark

The Infant Mortality Rate (IMR) fell to 24 in 2024, down from 25 in 2023 and 30 in 2019. This represents genuine progress, and the trend is broad-based. Rural IMR is now 27 and urban IMR has dropped to 17. The Under-Five Mortality Rate (U5MR) stands at 28.

However, the state-level disparity is alarming. Chhattisgarh has an IMR of 36 — meaning one in every 28 infants born in that state does not survive to see their first birthday. Kerala, at the other end, has brought its IMR down to 8, a figure comparable to many developed countries. For context: China’s IMR is around 5, Germany’s is 3, and Bangladesh has brought its own figure down to roughly 24 — broadly matching India’s national average today despite having a fraction of India’s healthcare resources.

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Sex ratio at birth: a marginal improvement that conceals large state-wise gaps

The Sex Ratio at Birth (SRB) improved marginally to 918 females per 1,000 males for the 2022–24 observation window, up by one point from the prior period. Chhattisgarh leads at 978 and Uttarakhand records the lowest at 872. The rural SRB (914) remains below the urban figure (928).

The persistence of adverse sex ratios at birth in several of India’s wealthier states — Haryana, Uttarakhand, parts of Gujarat and Punjab — continues to be a structural concern. Wealthier households in India have historically used selective practices more than poorer ones, and the data does not yet show a decisive break from that pattern. The aggregate national improvement, while welcome, masks these pockets.

 

Healthcare access: strong at birth, nearly absent at death

Perhaps the single most striking finding of the 2024 SRS report is the yawning gap between healthcare access at two critical moments: birth and death. A remarkable 95.4% of births in India now receive medical attention at the time of delivery — testament to the success of institutional delivery schemes like the Janani Suraksha Yojana over two decades. But only 40.2% of deaths involved medical care before death. In rural India, that figure drops further: nearly half of all rural deaths (48.9%) occur without any medical attention at all.

What this means: India has built a formidable system for protecting lives at their start. It has not built a comparable system for managing lives near their end. As the population ages — which the fertility and mortality trends together guarantee — the absence of geriatric care infrastructure, chronic disease management, and end-of-life medical support will become an increasingly serious fiscal and humanitarian problem.

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The report also records a rise in accidental and self-inflicted deaths. Deaths from motor vehicle accidents now account for 3.2% of all deaths, and deaths by suicide have risen to 2.8%. These are not large numbers in absolute share terms, but the directional trend — rising in both categories — is worth tracking against the backdrop of rapid urbanization, economic stress, and the erosion of traditional social support structures.

What it all adds up to

Taken together, the 2024 SRS data paints a picture that is known to all but believed by only a few. It has therefore still not fully entered the mainstream investment and policy conversation.

The birth rate is declining and will continue to decline. The death rate is sticky, with elderly cohorts growing faster than they are being replaced by younger ones. The TFR has been below replacement for five straight years, and the urban TFR is already at levels that Western Europe achieved only after decades of demographic decline. The window for harvesting a demographic dividend — defined broadly as the period when the working-age population is large relative to dependents — is not merely narrowing. In the urban and more productive half of India, it has already closed.

The implications for the economy and markets, as flagged in the 2022 post, remain unchanged and are if anything sharpening. Wage pressure will increase as the working-age cohort peaks. Consumption patterns will shift toward healthcare, pharmaceuticals, assisted living, and financial products oriented toward retirement and wealth preservation — away from housing, personal mobility, and youth-oriented discretionary goods. The fiscal burden of an ageing population will grow: pension liabilities will expand, healthcare spending will need to rise sharply, and the taxable base will shrink unless female labour force participation improves meaningfully.

The 16 states and union territories already below the replacement rate — including the economically dominant ones — are not going to reverse course in any policy-relevant timeframe. India is not heading toward a demographic crisis in the near term. But it is heading, quietly and with growing momentum, toward a demographic maturity for which neither the government’s fiscal framework nor the market’s long-term valuation assumptions appear adequately prepared.