Slowing nominal GDP growth points to weaker corporate earnings in FY26
NOOR MOHMMED
11/Jul/2025

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Slower nominal GDP growth suggests softer corporate earnings for FY26, impacting revenue and profit expectations.
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Sectors sensitive to domestic demand and pricing power may see margin pressure as economic growth moderates.
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Investors should monitor GDP trends, inflation outlook, and corporate guidance for strategic portfolio positioning.
India’s nominal GDP growth—a critical indicator for corporate revenue and profit expectations—is showing clear signs of moderation heading into FY26. This slowdown has broad implications for corporate earnings, investor sentiment, and stock market valuations.
In this article, we explain why nominal GDP matters so much for earnings, which sectors are most exposed, how investors should interpret recent data, and what it means for India's economic outlook in FY26.
What is Nominal GDP and Why Does It Matter?
Nominal GDP is the total value of goods and services produced in the economy at current market prices, including inflation. Unlike real GDP, which strips out inflation to measure true volume growth, nominal GDP captures both real growth and price changes.
For corporate earnings, nominal GDP is particularly important because:
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Revenue growth is strongly correlated with nominal GDP growth.
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Inflation pass-through affects pricing power and margins.
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Higher nominal growth often supports tax collections, government spending, and private investment, boosting demand.
When nominal GDP growth slows, companies may struggle to grow revenues, face pricing pressure, and see margins squeezed, especially if cost pressures remain.
The Recent Trends: India’s Nominal GDP Slows
After strong post-pandemic rebounds in FY22 and FY23, India’s nominal GDP growth cooled in FY24 and is projected to remain relatively subdued in FY25 and FY26.
Key drivers of the slowdown include:
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Lower inflation (part of policy success, but reduces nominal growth).
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Base effects fading after the pandemic bounce.
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Tighter monetary policy globally and in India.
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Mixed rural demand amid uneven monsoons and price volatility.
Government projections and private forecasts suggest nominal GDP growth could slow to 9–10% or lower in FY26, down from the double-digit pace seen in FY23.
Why Slower Nominal GDP Means Softer Corporate Earnings
Corporate earnings tend to track nominal GDP because:
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Top-line revenue growth often mirrors nominal demand growth.
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Companies’ ability to pass on costs depends on inflation trends.
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Slower nominal growth can mean slower wage growth, lower consumption, and tighter credit.
For FY26, this suggests:
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Lower sales growth for many sectors.
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Margin pressure if costs remain sticky.
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Softer earnings growth even for market leaders.
Sectors Most at Risk
While the entire market feels the impact, certain sectors are especially sensitive:
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FMCG and Consumer Discretionary: Rely on strong domestic demand. Slower wage and price growth reduces spending.
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Automotive: Tied to consumption and credit conditions.
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Industrials and Capital Goods: Depend on investment cycles, which slow with weaker nominal growth.
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Financials: Loan growth tracks nominal GDP. Credit quality may come under pressure if growth stalls.
Export-oriented sectors like IT and pharmaceuticals may be relatively insulated but face their own challenges from global demand trends.
Implications for Investors
Slower nominal GDP growth means analysts and investors need to adjust earnings expectations:
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Valuation multiples may compress if earnings growth stalls.
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Market leadership could rotate toward defensive sectors.
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Stock picking becomes more important, favouring companies with pricing power, cost control, and global exposure.
Investors should also track monetary policy signals, inflation outlook, and government spending plans for cues about demand support.
Inflation's Dual Role
Inflation is a double-edged sword for nominal GDP and earnings:
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Moderate inflation supports revenue growth and pricing power.
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High inflation hurts demand, increases input costs, and compresses margins.
In FY26, India’s inflation outlook is expected to be moderate but uncertain, with food price shocks (e.g., due to erratic monsoons) posing risk.
Policy Responses
Government and RBI policy will shape the trajectory:
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Fiscal policy may support rural demand, infrastructure spending, and targeted subsidies.
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Monetary policy will balance growth support with inflation control.
A coordinated policy approach is critical to sustain investment, create jobs, and support consumption even as nominal growth moderates.
Corporate Strategy Adjustments
Companies are already planning for this environment:
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Tightening working capital management.
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Reducing discretionary spending.
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Investing in automation and efficiency.
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Seeking exports and new markets.
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Focusing on premium products with better pricing power.
Such moves can help preserve margins and defend market share in a slower-growth world.
Historical Context
India has seen periods of nominal GDP slowdowns before:
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Early 2010s after the global financial crisis.
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During the 2017–2019 slowdown before the pandemic.
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COVID-19’s shock in FY21.
Each time, corporate earnings were hit, but companies adapted with cost controls, new products, and market diversification.
Outlook for FY26 and Beyond
While the near-term outlook points to softer earnings, India’s long-term growth story remains intact.
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Demographics continue to favour consumption.
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Urbanisation and formalisation support organised sectors.
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Digitalisation and infrastructure boost productivity.
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Global companies diversifying supply chains to India.
But investors should be prepared for cyclical headwinds in FY26.
Conclusion
India’s slowing nominal GDP growth is a clear signal that corporate earnings will likely be softer in FY26.
Investors need to recalibrate expectations, focus on company fundamentals, and be prepared for a more selective market environment.
Companies will need to navigate a challenging environment with cost discipline, strategic investment, and innovation to sustain earnings growth.
While this cycle brings risks, it also offers opportunities for well-managed businesses and long-term investors to build positions in quality names at reasonable valuations.
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