It's going to be good after it gets quieter

The economy is projected to moderate its growth in the current fiscal, raising the prospects of corporate earnings and profits peaking. This is a likely outcome, given inflation is trending towards target, and interest rates are yet to begin their descent. India Inc had increased its share of profits as a percentage of GDP in an environment of high inflation and low interest rates. The scenario is reversed now, with interest rates at their peak and disinflation in progress. Companies no longer have the pricing power they had in the immediate aftermath of the pandemic when consumption demand was roaring. That has now played out in manufacturing and services. The growth from here on should be more sedate, building on the economy's post-Covid revival. The markets are yet to price in this moderation, and some froth may be removed once the volatility around the election results settles.

While this may be the majority view about the economy's and, by extension, India Inc's prospects, it's certainly not the consensus one. The economy is undergoing four structural shifts that could negate the assumption of moderating growth. A long-overdue investment cycle is gaining momentum, with a positive effect on the economy's potential to grow. Exports are reviving with policy-induced manufacturing chipping in alongside services. Consumption demand is increasingly being supported through a new social security architecture. An infra upgrade could lead to a reset of the economy's growth-inflation trade-off. Each on its own has a knock-on effect on corporate profitability. Combined, the effect could be multiplied.

There will be some earnings moderation in the near term, though. That is because all three upcycles - investment, exports and consumption - are nascent. But once inflation and, as a corollary, interest rates turn benign, the economy should be firing on all cylinders. A sustained period of India growing above 8% has a reasonable likelihood. In that case, the markets may have got it right even at the current rich valuations.