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.

 

Why are markets in a state of disbelief?

Last week I raised a question that I believe lies at the heart of India’s current economic anxiety: why, despite the government and the RBI signaling growing concern — which, by historical precedent, should calm markets — are investors, particularly foreign investors, refusing to be reassured? (see here)

In my view, the disbelief is neither irrational nor transient. It is rooted in a confluence of structural, socio-political, and corporate factors that have been building for several years, and which the present crisis has simply made impossible to ignore. I would group them under four broad heads.

Macro weakness: Old problem, but with unfamiliar depth this time

India’s external and domestic macroeconomic position has deteriorated in ways that go beyond the cyclical discomfort of a typical crisis.

1.    Balance of Payments under structural strain: The current account deficit has widened, driven by persistently high energy import costs in a period of elevated West Asia tensions. More concerning is the composition of financing: net FDI has turned negative, and FII outflows have been large and sustained over three years. India is, for now, plugging the gap through forex reserves and debt flows — a less stable combination than equity-led capital.

2.    The rupee and the RBI’s impossible dilemma: The INR has weakened materially and has been among the worst-performing major currencies over the past year. The causes are multiple: BoP pressure, a widening yield differential with the US, and a rising tide of outward remittances and overseas portfolio investments by domestic HNIs through the RBI’s Liberalized Remittance Scheme. The RBI’s response has been constrained: hiking rates aggressively to attract foreign flows and defend the rupee would suppress growth in an already sluggish economy. Keeping rates low risks currency depreciation and imported inflation. This is not reluctance — it is a genuine policy trap, and investors know it.

3.    Inflation without growth: Rising inflation, driven by a weaker rupee and adverse weather, is compressing real purchasing power. The combination of rising prices and stagnant to declining real wages is particularly damaging to private consumption — the engine that India needed to fire in the absence of strong export or investment demand. The consumption story, which was central to the India bull case, looks increasingly fragile.

4.    Fiscal space is narrowing: The government’s fiscal position is under pressure from multiple directions: elevated subsidy commitments, defence spending following the May 2025 tensions, and weaker tax revenues in a slowing economy. This is reducing the government’s capacity to compensate through public capital expenditure — which had been the primary growth driver for the past four years.

5.    Valuation offered no cushion: Indian equities entered this downturn at stretched valuations. The Nifty 50 was trading at 20–22x forward earnings even as earnings growth was decelerating. When negative macro news lands on an expensive market, the correction can be disproportionate — and that is exactly what has happened. There was no margin of safety built into prices.

Socio-Political challenges: The harder conversation

These are the factors that investors discuss in private but rarely commit to paper. I will try to be precise rather than polemical.

1.    The pivot toward consumption control: The Prime Minister’s recent appeal for austerity — asking citizens to cut fuel use, forgo overseas travel, and defer gold purchases — sent a signal that many investors read as a reversion to pre-1991 thinking. (I discussed this at length in my earlier post, ‘Austerity vs. Reform’.) Whether that reading is entirely fair or not, the market impact is real: investors who were already watching the reform pipeline closely have grown more anxious about whether the government will reach for supply-side reform or demand-suppression controls.

2.    Subsidies, welfare spending, and labour market effects: The government’s increasing reliance on direct benefit transfers, free ration schemes, and cash transfers to consolidate its political base may not be inherently wrong — but its side effects on the private sector labour market are real. Labour availability and motivation in certain sectors have been affected by welfare floors that reduce the incentive to accept low-wage formal employment. This is a structural drag on manufacturing-led growth.

3.    Education quality and the demographic dividend at risk: India’s single most important long-term economic asset is its young population. But that asset is only valuable if the population is educated and skilled. The data on learning outcomes — whether ASER surveys or international comparisons — tells a deeply uncomfortable story. If the demographic dividend passes without a commensurate investment in human capital, it becomes a demographic burden. Sophisticated long-term investors are beginning to price this in.

4.    Governance quality and institutional confidence: Several global investors have expressed, with increasing directness, concern about the quality and independence of Indian institutions — the judiciary, the regulatory apparatus, and law enforcement. These concerns are not new, but they have intensified. When investors cannot trust that contracts will be enforced, that regulations will be applied consistently, or that disputes will be resolved impartially, the risk premium they demand rises — sometimes dramatically.

Corporate growth visibility: The profit-investment paradox

Perhaps the most paradoxical aspect of the current situation is that Indian corporate balance sheets are in excellent shape — and yet confidence in future earnings is low. The reasons for this are structural.

1.    Profits without purpose: As Chief Economic Adviser Dr. V.A. Nageswaran has noted, corporate India tripled its net profits between FY21 and FY25, while cutting its debt-to-equity ratio from 139% to 94%. Cash reserves swelled from ₹9 lakh crore to ₹16 lakh crore. Private investment as a percentage of GDP fell to a 20-year low. The money is there. The willingness to deploy it in productive assets — factories, R&D, new technologies — is not. Instead, promoters are accumulating profits, setting up family offices, and increasing overseas investments. This is rent-seeking at scale, and it destroys future earnings potential even as it flatters current balance sheets.

2.    The three large sectors offer moderate visibility at best: Financials, IT services, and FMCG collectively dominate index earnings. All three face meaningful headwinds. Financials are managing through margin compression and pockets of asset quality stress in the retail and MSME book. IT services is navigating weak global discretionary technology spending and the early disruptions from AI-driven efficiency gains on the demand side. FMCG is struggling with volume growth in a real-wage-compressed consumer environment. None of this is catastrophic, but none of it inspires conviction either.

3.    Financial system stress is a risk, not just a concern: Rising financing costs and persistent inflation increase the probability of stress in the financial system — particularly in unsecured retail lending, microfinance, and small business credit. The RBI has been flagging this, and the market is beginning to price a higher probability of credit cost escalation than consensus earnings estimates currently reflect.

The changing global order: India’s ambiguity has a price

This is the factor that is perhaps most underappreciated in domestic commentary, but which global investors flag consistently.

1.    Strategic ambiguity in a polarizing world: The ongoing West Asia conflict, the continued Russia-Ukraine war, and the accelerating US-China decoupling are forcing every country to make choices about where it stands in the emerging global order. India has, with considerable skill, maintained strategic autonomy — balancing relationships with the US, Russia, and the Gulf. That balancing act is becoming harder. The costs of ambiguity are rising: trade partners want clarity on supply chain alignment, technology partners want assurance on data security and geopolitical reliability, and capital allocators want predictability on which side of the emerging economic blocs India will ultimately sit. India has not provided those answers, and the uncertainty is keeping investment at bay.

2.    The technology dependency trap: As Dr. Raghuram Rajan has written, India’s approach to the AI era risks repeating — and deepening — the mistake of the IT services era. India provides the land, power, and construction for data centres owned by US hyperscalers. The LLMs running on those servers are designed in California. The chips are fabricated in Taiwan. India contributes inputs; the intellectual rent flows out. This is not self-reliance. It is a sophisticated form of technological dependency, with stronger lock-in than the earlier IT services model. Investors who understand technology cycles are asking whether India has the innovation infrastructure to build the next layer — and the honest answer, today, is no.

The Real Reason for Disbelief

Taken individually, each of these factors would be manageable. Taken together, they describe a situation where the authorities’ panic — however genuine — may simply not be adequate to address the scale of what needs fixing.

Past crises — 1990, 2008, 2020 — had sharp triggers and identifiable remedies. The RBI cut rates; the government spent; the rupee fell and exports recovered; the crisis passed. The market knew what medicine was available and trusted that the doctor would administer it.

The present situation is different. The headwinds are structural, not cyclical. Rate cuts cannot fix a corporate investment drought driven by rent-seeking incentives. Fiscal stimulus cannot substitute for the human capital investment that was deferred over a decade. Forex intervention cannot sustainably defend a currency whose weakness reflects deep competitiveness questions. And no single policy action can resolve India’s strategic positioning in a fracturing global order.

Markets are not in disbelief because they doubt the government’s sincerity. They are in disbelief because they are looking at the medicine cabinet and wondering whether any of the available remedies actually treats the disease.

That is a harder problem than any previous Indian crisis has posed. And until investors see credible evidence of structural remedies — not just cyclical stabilization — the disbelief is likely to persist.

Also read

Markets in a State of Disbelief

Indian Economy – At an Inflection Point

Austerity vs. Reform: Which Way Are We Headed

Rein Your Horses

 

Markets in a state of disbelief

“Markets stop panicking when the authorities begin to panic.”

The logic behind this old adage is intuitive: in a sudden crisis, financial markets typically price in the worst-case scenario well before governments, central banks, and regulators even acknowledge the problem. Once the authorities do act — through stimulus, rate cuts, liquidity injections, or other interventions — the corrective measures tend to limit the actual damage, providing an immediate floor and often a sharp rebound to stock prices that had already discounted catastrophe.

Empirical evidence

1990 — Balance of Payments Crisis: Fuelled by fiscal deficits, dwindling foreign reserves, and the Gulf War oil shock, India was pushed to the brink of sovereign default. The government’s eventual response — including pledging gold reserves and accepting an IMF bailout — marked the beginning of India’s landmark economic liberalisation. Markets recovered.

1998 — Asian Financial Crisis Contagion: Contagion from the 1997 Asian Financial Crisis rattled the rupee and slowed growth. Tight monetary policy and fiscal prudence steadied the ship.

2008 — Global Financial Crisis: The collapse of Lehman Brothers triggered a sharp stock market crash and industrial slowdown. A coordinated response of fiscal stimulus, rate cuts, and liquidity injection arrested the fall.

2013 — Rupee and Current Account Crisis: A widening current account deficit combined with US Federal Reserve tapering signals drove the rupee to ₹68/USD with inflation surging. The RBI’s decisive rate hikes and forex market interventions restored confidence.

2020 — COVID-19 Pandemic Shock: Nationwide lockdowns contracted GDP by an estimated 7.3%. But aggressive fiscal support (PMGKY), RBI liquidity measures, and deep repo rate cuts helped markets stage one of their sharpest recoveries on record.

In each case, the pattern held: authorities panicked (or at least acted decisively), and markets calmed.

The latest episode

The Indian economy is navigating a confluence of serious headwinds. The India-Pakistan military stand-off in May 2025 rattled investor sentiment. Sweeping changes to US tariff and immigration policy, which began taking effect through 2025, disrupted trade flows and created uncertainty for Indian exporters and the IT-services sector. An escalating conflict in West Asia — with implications for oil prices, remittances, and regional stability — has added another layer of risk as of early 2026.

Financial markets have responded accordingly, and painfully. Bond yields have risen sharply. The rupee has weakened significantly, ranking among the worst-performing major currencies over the past year. Equity markets have corrected meaningfully — the Nifty 50, which stood near 23,465 in mid-2024, has gone essentially nowhere in two years, even as several peer markets have advanced. Indian equities have strikingly underperformed comparable emerging markets.

So far, this fits the familiar script. Market pricing in the worst.

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The adage is being tested

The Prime Minister has, in recent public statements, signaled growing concern about the economic situation — a rare and telling departure from the usual official optimism. The RBI Governor has similarly struck a more cautious tone. In other words, the authorities appear to be beginning to panic.

By the logic of the old saying, this should be the inflection point. Markets should be bottoming out. Relief should be setting in.

And yet — the panic in markets is not subsiding.

Why are markets in a state of disbelief?

Is it that investors doubt the adequacy of the policy response? Is the nature of this crisis — multi-front, geopolitical, and partly beyond India’s control — fundamentally different from past ones? Or is something else at work?

…more on this next week