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
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