Govt lifts India's growth, but at what cost

India's economic performance is influenced by more than just free-market forces, as highlighted by a Bernstein report. Company earnings, domestic consumption, and asset valuations are increasingly shaped by regulatory interventions, tax incentives, and substantial government transfers. The report notes that market observers often celebrate headline performance without considering the structural offsets.

The interconnected economy means gains in one sector are often due to absorbed losses in another. Temporary supports are frequently treated as permanent improvements, while costs absorbed elsewhere are ignored. The NSE 200's June quarter earnings grew by 8 percent, but this growth was supported by oil marketing losses, government excise cuts, and increased LPG and fertiliser subsidies.

The report stresses that a portion of current earnings is supported by government incentives rather than underlying operating economics. The Production Linked Incentive schemes have supported domestic manufacturing, localization, and investment, but investors often treat PLI-supported profits as permanent earning power. Distortions in rural consumption, domestic capital flows, and currency stability also contribute to the distorted economic outlook.