Higher earnings by India Inc, which hit a multi-quarter high in the June quarter, and the resultant headline economic resilience appear to have been artificially engineered through around $20 billion in fiscal cushions and subsidies, along with borrowed offshore dollars that seemingly stabilised the rupee, rather than being driven by genuine productivity gains, global brokerage Bernstein said.
According to Bernstein, these economic distortions are leading market participants to mistake temporary policy interventions for permanent operating strength. Growth driven by structural distortions rarely generates outsized equity returns, it said in a report on Friday.
Noting that oil marketing companies (OMCs) are heavily loss-making and that their stronger “underlying” growth story has been manufactured through huge subsidies, Bernstein said OMCs absorbed roughly $2 billion in losses during the first quarter, while the government took an additional $8-10 billion hit through excise duty cuts and expanded LPG and fertiliser subsidies.
In an economy where the aggregate quarterly earnings pool of the NSE 200 stands at just over $38 billion, this combined $10-12 billion transfer directly subsidised consumer spending power and artificially padded the operating margins of other consumer-facing companies, the report said.
Consumer demand, too, has been flattered by rolling policy interventions rather than sustainable income expansion, Bernstein said, pointing to the September 2025 GST cuts, which provided households with a roughly $20 billion windfall and pulled forward demand in discretionary sectors where base-quarter growth had stagnated.
Corporate balance sheets in several key manufacturing and consumption segments are also increasingly relying on state support to defend profitability, Bernstein said, pointing to the production-linked incentive (PLI) framework, under which the government has disbursed more than Rs 28,700 crore since FY23.
On the macroeconomic and currency fronts, Bernstein said rupee stability was being “purchased on credit”, anchored by an estimated $70-80 billion in foreign currency inflows, notably FCNR(B) deposits and external commercial borrowings (ECBs).
However, actual non-resident equity in these deposits accounts for only $6-7 billion, with the remaining balance driven by 9-18 times bank leverage, it said. Since these debt inflows carry maturities of three to five years, “the pace of rupee depreciation will accelerate significantly over the coming years,” Bernstein said.