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đź“°India's Corporate Earnings Drive Disproportionate GDP Growth

In fact, India’s EPS-to-GDP sensitivity now exceeds that of both the U.S. and China, even though its economy remains far more fragmented and informally employed.

June 27, 2025

Good afternoon, 

In most large economies, a 1 percent increase in GDP translates to modest gains in corporate earnings. But in India, the dynamic is remarkably different. In fact, India’s EPS-to-GDP sensitivity now exceeds that of both the U.S. and China, even though its economy remains far more fragmented and informally employed. This weird quirk is both important and transformative for how India’s economy will shape as it grows.

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Market Update.

India’s Unlikely EPS Machine: Why 1 percent GDP Growth Delivers Outsized Corporate Profits?

In most large economies, a 1 percent increase in GDP translates to modest gains in corporate earnings. The logic is intuitive: economic growth is broadly distributed, with much of it accruing outside the listed company universe—in small businesses, household income, or informal activity. But in India, the dynamic is remarkably different. A single percentage point of GDP growth routinely drives outsized growth in earnings per share (EPS) and corporate profitability. In fact, India’s EPS-to-GDP sensitivity now exceeds that of both the U.S. and China, even though its economy remains far more fragmented and informally employed.

This isn’t just a statistical quirk; it reflects a deeper structural reality: India’s GDP is unusually concentrated in a narrow set of formal, listed firms. As a result, incremental gains in consumption, infrastructure spending, or financial penetration disproportionately benefit a few hundred companies, amplifying the flow-through to earnings.

Breaking down the trend: Recent analyses suggest that in India, every 1 percent increase in GDP growth can translate to as much as 1.5 to 2.0 percent growth in earnings per share for the Nifty 50 companies. By contrast, in China, the corresponding EPS boost is closer to 1 percent, and in the U.S., it’s often below 0.7 percent. These differences reflect a profound divergence in how national income is distributed and who captures its upside.

India’s top 200 listed companies account for over 70 percent of the country’s formal corporate profits, yet employ less than 1 percent of the labor force. This is in sharp contrast to China, where state-owned enterprises and sprawling private-sector ecosystems share the spoils of growth more diffusely. In the U.S., large-cap firms certainly dominate capital markets, but household consumption and a vast services economy temper the earnings concentration.

What makes India stand out is not just its concentration, but the composition of that concentration. Many of India’s largest listed firms sit at the apex of their respective value chains, banks, energy companies, software exporters, and consumer goods conglomerates, all sectors with scalable cost structures and rising operating leverage. When demand ticks up or interest rates move favorably, these firms can expand margins rapidly without a proportional increase in costs. In economic terms, they are high beta to GDP.

The paradox of the informal sector: On paper, this EPS-growth sensitivity should be counterintuitive. India still has one of the largest informal sectors in the world, employing an estimated 80–85 percent of its workforce. Street vendors, small manufacturers, agricultural laborers, and gig workers contribute meaningfully to GDP, yet remain largely outside the tax net, banking system, and equity markets. This informality implies that a big chunk of economic activity is underrepresented in corporate earnings.

But paradoxically, it’s this very asymmetry that strengthens the linkage between GDP and listed-company profits. Because formal-sector firms operate in relatively oligopolistic environments, even modest shifts in demand, whether in credit, real estate, or consumer staples, flow to a small base of firms with well-developed distribution, pricing power, and capital access. When GDP expands, the informal sector may grow in volume, but it’s the formal sector that captures value.

A classic example is the post-COVID consumption recovery. While millions of small businesses struggled with supply chain shocks and credit scarcity, large-cap FMCG players and private banks reported record profits. Organized players gained market share as informal competitors exited, further deepening the earnings concentration.

Structural tailwinds: Several structural shifts have intensified this phenomenon. Post-2016 initiatives such as demonetization, the rollout of GST, and the rapid adoption of UPI have formalized large swaths of the Indian economy, redirecting flows of tax revenue, digital payments, and credit from informal channels toward banks and organized retail. Simultaneously, a revival in capital expenditure, fueled by rising public investment and cleaner private-sector balance sheets, has boosted operating leverage for capital goods firms, infrastructure players, and cement manufacturers, especially in sectors like roads and renewables where incremental demand funnels through a small set of dominant contractors and suppliers. 

India’s export-oriented IT and pharmaceutical sectors, while decoupled from domestic consumption cycles, still benefit from a growing GDP through factors like talent pool expansion, currency tailwinds, and increased capital inflows. At the same time, urbanization and digitization are driving aspirational consumption, with more households shifting from unbranded to branded goods, again benefiting the same narrow set of large, listed companies. Together, these dynamics form a powerful earnings engine: when GDP ticks up, the EPS response is not just positive, it is superlinear, amplified by formalization, scale, and structural concentration.

Associated risks: Of course, this model is not without risks. The same concentration that fuels EPS growth also makes India’s stock market vulnerable to narrow shocks. If regulatory changes, global capital flight, or domestic political risk hit a few key sectors, like private banking or energy, the ripple effects on corporate earnings can be sharp and disproportionate.

Moreover, high EPS sensitivity can sometimes mask wider economic distress. In 2022–2023, India reported record corporate profits even as rural wage growth stagnated and small business closures remained elevated. For policymakers, this underscores the challenge of creating inclusive growth, not just GDP expansion, but employment-intensive and equitable growth.

There’s also the risk of over-indexing on a few large companies. Foreign institutional investors often treat India as a “top-down” macro play, crowding into the same few large-cap names. While this has benefited equity valuations and capital formation, it leaves India vulnerable to style reversals or sudden shifts in global risk appetite.

Looking ahead: If India continues on a 6–7 percent GDP growth trajectory over the next decade, the earnings implications for listed firms could be staggering. A 1.5x EPS multiplier on that growth suggests high teens annual earnings expansion, a pace that, if sustained, justifies premium equity valuations relative to EM peers.

But the real test will be whether this model remains politically and socially sustainable. Concentrated gains make for impressive shareholder returns, but also invite pressure to reinvest those profits in broader development, whether through job creation, innovation, or infrastructure.

In the meantime, investors betting on India’s future would do well to remember this: in most markets, GDP growth is a tide that lifts many boats. In India, it’s a narrow canal, and the boats at the front move much, much faster.

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Written by Eshaan Chanda & Yash Tibrewal. Edited by Shreyas Sinha.

Disclaimer: This is not financial advice or recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.