Over the past two decades, Indian stock markets have consistently outperformed the US stock markets, often regarded as the benchmark, with an annualized return of 10% in dollar terms as compared to 6.2% from the US stock markets. 

Notably, the MSCI India index has also demonstrated superior performance compared to both the MSCI Emerging Markets Index and the BCI (Brazil, India, and China) Index since 1994. The graph says it all

This outperformance trend is anticipated to extend for another 2-3 decades, notwithstanding expected volatility along the way. Analyzing the factors driving this optimism reveals a compelling story.

Corporate earnings growth versus GDP growth. While short-term stock prices may be influenced by market sentiments, over the long term, equity markets are slaves to earnings and business profits. In India, earnings growth lagged behind GDP growth in the past decade (2010-2021), but in the last two years, it has started aligning with GDP, poised to surpass it in the coming years before a mean reversion occurs.

Several factors contribute to this robust earnings cycle

Macro stability has been achieved through a proactive approach to inflation. Unlike the pre-2015, the Reserve Bank of India’s focus only on inflation rather than managing growth and inflation both, has enhanced macro stability. Changes in trade dynamics and reduced reliance on global capital have further fortified the Indian economy against external shocks, especially oil. The oil consumption has been reduced drastically over the last 5-6 years due to GST implementation and the abundance availability of electricity.  

The GST implementation has eradicated interstate borders with seamless moments of trucks across the country without waiting thus reducing the turnover time and the oil consumption. Similarly, with electricity available all across the country, there is no requirement for diesel for the generator sets. 15 years ago, our oil consumption was 100 million barrels with a 1 trillion dollar economy, and now with almost 4 times the economy(4 trillion dollars), the consumption has increased by only 60% to 160 million barrels.

India’s reduced dependence on foreign capital is evident in financial markets, with an emphasis on foreign direct investment (FDI). The country has weathered a Federal Reserve interest rate increase (5.5% increase in a span of a year and a half) without substantial currency depreciation, a marked improvement from the similar challenges faced in 2013 when the INR depreciated by more than 15% in a span of nine months.

Corporate profits received a boost in 2019 with a reduction in corporate taxation, aiming to stimulate investments and job creation. India is only halfway through a profit cycle, with profit share in GDP rising from a low of 2% in 2020 to about 5% currently, and likely heading to 8% in the coming four to five years. The US markets peaked with a 13% profit share in GDP.

The current Corporate Capex to GDP ratio stands at approximately 5%, compared to 4% in the fiscal year 2003-04 and a peak of 17% in 2010. This indicates a substantial influx of capital expenditure in the coming years, promising significant contributions to investments and job creation.

Allowing retirement funds to invest in equities in 2015 Indian households continue to be less exposed to equities relative to other asset classes, and we see the domestic bid on stocks being sustained for a long time, as it was in the US from 1980 to 2000 when retirement funds were allowed to invest in stocks. The US markets had a great bull run for those 20 years with Nasdaq peaking out at 100 PE multiple. India did the same with its retirement funds in 2015 setting the stage for a boom in domestic equity flows. This great Indian bull run because of its demographics is likely to continue for 2-3 decades albeit corrections en route.

The other drivers in the India’s structural bull market are:

India’s digital infrastructure has significantly reduced know-your-customer (KYC) costs and granted access to the banking system for previously unbanked individuals. This has facilitated the electronic transfer of funds, effectively mitigating previous leakages. Additionally, the open credit enablement network holds the promise of integrating several million people into the formal credit system. This powerful combination not only ensures access to bank accounts but also enhances efficiency in social transfers, contributing to a more inclusive and streamlined financial landscape. The financial penetration is way ahead of per capita income.

Consumption Boom. India’s income pyramid diversity propels momentum in consumer spending, set to benefit from crossing the pivotal US$2,000 per-capita GDP threshold. This milestone denotes a growing proportion of discretionary spending. Anticipating a fivefold increase in households earning over US$35,000/year in the next decade, surpassing 25 million people, India emerges as a compelling future market for luxury consumption. This surge is a key factor fueling multinational corporations’ keen interest in the country. Moreover, the consumption upswing is bolstered by the anticipated increase in private credit to GDP, expected to climb from the current 57% to 100% by the turn of the decade.

Risk Factors

Global Economic Headwinds

  • The global economy is grappling with high levels of debt, an aging population, and a noticeable deceleration. Projections indicate a modest global GDP growth of around 3%, posing challenges for worldwide economic performance.

Oil Price Volatility

  • India’s economic stability faces a potential challenge from oil pricing. While the nation can manage prices up to $120 per barrel, any escalation beyond this threshold could pose a significant risk and impact various sectors.

Political Uncertainties

  • The stability of India’s political landscape is crucial for market confidence. Markets thrive on continuity, and any substantial changes in the Central Government, especially anticipated in the coming year, may trigger concerns and uncertainties among investors. A potential shift in political dynamics could influence market sentiments and warrant careful observation.


  • The outperformance trend of Indian stock markets is expected to continue for the next 2-3 decades.
  • Corporate earnings growth in India, lagging behind GDP in the past decade, is now aligning and poised to surpass GDP in the coming years. Rising earnings will boost the stock prices.
  • The Indian equity market presents a compelling investment opportunity with a favorable long-term outlook, driven by robust economic fundamentals and strategic structural factors.
  • Don’t miss out on this great Indian growth story. Do allocate a substantial portion of your investments to equity in your portfolio.
  • Invest regularly in stocks preferably through mutual funds as part of SIPs
  • If navigating investment nuances proves challenging, seek professional assistance for a more informed and tailored approach to wealth creation. Your journey into the Indian market’s promising trajectory can be optimized with strategic and informed investment decisions.

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This article is only meant for academic purposes and does not constitute any investment advice of any sort. Please consult your financial advisor before making any investment decision. Financial markets are subject to market risks. Read all documents carefully before taking any action. Data Source. Morgan Stanley

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