Reviving India's Equity Market: Lessons from Abenomics and the Road to Earnings Recovery

In 2025, year to date, key indices such as the Nifty 50 and Sensex have achieved limited gains of approximately 5.97 per cent and 5.42 per cent, respectively, significantly trailing wider emerging market counterparts like the MSCI Asia-Pacific ex-Japan index, which has advanced more than 25.4 per cent. In the last one-year, Indian indices have generated negative returns. This disparity has positioned India as one of the worst-performing major equity markets globally in dollar terms, with returns dipping to as low as 1.9 per cent when accounting for the rupee's external depreciation. The underperformance arises from multiple elements, including restrained corporate profits, ongoing divestments by overseas investors in local stocks, U.S. tariffs and tepid internal consumption.

Key Questions from Investors

Market participants and experts are pondering critical issues: When could Indian equities regain momentum, particularly given their ongoing lag against emerging markets? When might earnings expansion return—the primary culprit of such underperformance.

Earnings Momentum and Valuations

India's earnings trajectory continues to be lacklustre. Expansion has remained in the low single digits across five consecutive quarters, with overall profits increasing only 7.5 per cent in Q1 FY26. Projections for the full year have been trimmed to 8 per cent, as dominant industries like banking and information technology grapple with squeezed margins and subdued demand from the U.S. Nevertheless, amid this subdued environment, valuations stay elevated. The Nifty is priced at 19.3x forward earnings, considerably higher than comparables like South Korea at 10.4x. Based on the past twelve months, earnings growth stands at a mere 4.5 per cent, yet the index holds a PE ratio near 22. This discrepancy results in India's PEG ratio exceeding 4–5, over twice that of the S&P 500's 2–2.5. For international investors, this blend of sluggish earnings and inflated valuations has been difficult to overlook, leading to a subtle shift of capital to alternative regions.

Drawing Insights from Abenomics

To tackle these issues, we can glean lessons from macroeconomic dynamics and Japan's Abenomics under Shinzo Abe, which aimed for rejuvenation via focused policy 'arrows' to boost earnings and market vitality. Abenomics, the revitalisation approach led by former Japanese Prime Minister Shinzo Abe, was built on three arrows: bold monetary relaxation to fight deflation, adaptable fiscal incentives to encourage expenditure and systemic changes to boost efficiency. Japan contended with inertia due to substantial debt, minimal expansion and population-related hurdles. These arrows provide a framework for analysing India's present economic path and its effects on equity market outcomes.

First Arrow: Monetary Easing in India

India's equivalent of the initial arrow is monetary relaxation. The Reserve Bank of India (RBI) has lowered rates by 100 basis points from February to June 2025 and decreased the cash reserve ratio by 100 basis points, bringing it down from 4 per cent to 3 per cent of Net Demand and Time Liabilities (NDTL). This step is projected to infuse about Rs 2.5 lakh crore into the financial system, improving liquidity and aiding credit expansion. Lowering the reserve mandate allows banks greater resources for loans, which could reduce borrowing expenses for individuals and enterprises.

Second Arrow: Fiscal Stimulus Measures

The second arrow, fiscal incentives, is reflected in recent initiatives, such as the most extensive GST revision in eight years. Reductions in taxes on basic items (now exempt or at 5 per cent) and desirable products (reduced to 18 per cent) seek to revitalise spending, which has been underwhelming, as shown by consumer goods firms like Hindustan Unilever posting only a 2 per cent revenue increase in FY25. These actions, along with waivers on health insurance premiums and decreased rates on cement, might enhance areas like fast-moving consumer goods, automobiles and medical services, promoting recovery based on higher volumes. This is expected to mitigate outside strains such as U.S. tariffs (reaching 50 per cent on Indian products) that have caused USD 15-16 billion in overseas capital exits, worsening the lag and possibly reducing GDP growth by 0.6-0.8 per cent.

Third Arrow: Structural Reforms and Challenges

The third arrow, systemic changes, continues to be India's enduring advantage. Continuing efforts in infrastructure, the digital sector and production (for instance, Production-Linked Incentives) align with Abenomics' emphasis on productivity. However, additional progress is essential here. Future reforms ought to involve deregulation and simplifying entry for Foreign Institutional Investors (FII) and Foreign Direct Investment (FDI) into Indian markets. India's net FDI has dropped sharply by 96.5 per cent to USD 353 million in FY25, marking a historic low. Moreover, roughly 15,000 millionaires have left India over the past three years, draining an estimated USD 50 billion each year from the economy. Therefore, redirecting attention from prominent policies to resolving fundamental, frequently ignored problems is key to realising India's full economic capabilities.

Turning to Earnings Revival

I am confident that these three arrows will begin to contribute to earnings resurgence shortly. A recovery appears probable starting Q3 FY26, propelled by the elements, enhanced by seasonal demand during festivals, a favourable monsoon supporting rural resurgence and the rollout of policies. General projections estimate FY26 growth at 8-9 per cent, rising to 13-15 per cent in FY27, with possible 5-10 per cent revisions upward in major industries. This outlook is poised for adjustment based on initial responses and statements from various automotive firms. Moving forward, an RBI document suggests preparations for enhanced growth and consumption in the latter part of FY26, fuelled by GST changes, solid local demand and positive monsoon effects. These aspects are anticipated to bolster credit expansion, especially in retail and small-to-medium enterprise segments.

Path for Stocks to Outperform

For equities to surpass emerging markets once more, this earnings resurgence is crucial. In the near term, markets could stay within a band (Nifty 24,000-25,500), but a rally in the second half of FY26 might emerge if tariffs lessen and local investments (mutual funds with Rs 4 lakh crore in reserves) counterbalance FII hesitancy.

In conclusion, although 2025 has challenged endurance, policies inspired by Abenomics set India up for a comeback driven by earnings by mid-FY26. Continue holding strong assets; the arrows are coming together.

Disclaimer: The article is for informational purposes only and not investment advice.