India’s growth gets a government lift, Bernstein flags hidden costs

New Delhi: India's current economic outcomes are being shaped not purely by free-market forces but by a series of distortions. As per a report by Bernstein, company earnings, domestic consumption, and asset valuations are increasingly influenced by regulatory interventions, tax incentives, and substantial government transfers rather than underlying productivity gains.

The report noted that market observers frequently celebrate headline performance without accounting for structural offsets. An interconnected economy means that gains in one sector often stem directly from absorbed losses in another.

"As we reviewed commentary around the recent earnings season in India, there seemed to be far more enthusiasm for stripping out the negatives than for understanding their underlying causes," the report stated. "Temporary supports were often treated as permanent improvements, while costs absorbed elsewhere were conveniently ignored."


The report underscored this dynamic through the performance of the NSE 200, where June quarter earnings grew by 8 per cent. The report pointed out that while the combined earnings pool stood at a little over USD 38 billion, oil marketing companies incurred USD 2 billion in losses, alongside an estimated USD 8 to 10 billion impact absorbed by the government through excise cuts and increased LPG and fertiliser subsidies. This transfer supported consumer spending elsewhere in the system while reducing state capital expenditure capacity.

"If the 100th company in an economy donates USD 50bn to consumers, who then spend it on the products of the other 99 companies, it would be incorrect to ignore the loss-making company and celebrate the strong earnings growth of the remaining 99," the report explained. "The gains and losses are linked."

The report also identified Production Linked Incentive schemes as a key driver of reported profitability in the electric vehicle and electronics manufacturing sectors. Since financial year 2023, the government allocated over Rs 287 billion across various manufacturing industries under the incentive framework.

"None of this is an argument against PLI. The program has supported domestic manufacturing, localization and investment. The point is a different one: a portion of current earnings is being supported by government incentives rather than purely by underlying operating economics," the report observed.

"Yet investors often capitalize PLI-supported profits with the same P/E multiple as recurring earnings. The risk is that temporary policy support is treated as permanent earning power," the report added.

The report pointed out additional distortions across rural consumption, domestic capital flows, and currency stability. Rural spending resilience persists largely due to government direct transfers rather than productivity gains or farm income expansion.

Meanwhile, external debt and leveraged currency deposit schemes mask underlying pressures on the rupee.

"Policy interventions, incentives, liquidity, and human behavior can temporarily reshape outcomes, making growth seem stronger, risks seem smaller, and trends appear more durable than they eventually prove to be," the report cautioned. "Distortions rarely feel like distortions while they are occurring. In the moment, they are often celebrated as evidence of strength. Only with hindsight does it become clear which gains were sustainable and which were merely borrowed from the future."