GDP decoupled from indices

It is an accepted norm. Unless a nation’s GDP grows at a frenetic pace, double-digit or nearabout the figure, the returns from its stock markets will never be decent. High growth equates higher returns from investments. This is why we get excited when India grows at seven-eight per cent a year. We assume that this will translate into higher corporate earnings due to higher volumes and profits, lower price-earning valuations of the stocks and, hence, opportunities for the stocks to rise in the future. In such cases, we expect the stock market rallies to be secular, i.e., almost each stock, whether large-cap, midcap, or small-cap, will rise in tandem with the GDP.

However, this may be a fallacy. In many cases, the stock rallies can either precede high GDP growths, or lag the latter. In effect, there is no cause-and-effect between the two, although a correlation, with time lags, may be there. According to data collated by DSP Mutual Fund, “Investors often assume that fast-growing economies will automatically generate high equity returns, but 30-year, inflation-adjusted data show several high-growth markets, including Malaysia, Indonesia, the Philippines, and China, where real equity returns have lagged real GDP growth or even turned negative.”

The fact remains that stock prices, and stock indices reflect the strengths or weaknesses in corporate earnings, or the balance sheets of the firms, as well as how capital is allocated by them, along with issues related to business ethics, management, and corporate governance. In addition, stock prices reflect the future. Although current events influence the stock movements, like changes in interest rates, or corporate actions and decisions, the long-term, or medium-term shifts are dictated by what is expected of corporate performances over the next 2-3 years. The past, as well as the future, is embedded in current stock prices, and indices.

Let us look at the stock prices and indices in India in 2025. During the second half of the calendar year, when the GDP growth rate for the first quarter of the fiscal year came in, it was an unexpected 7.8 per cent. Neither the stocks or indices reacted in September. In December, the second quarter growth was announced at a higher 8.2 per cent, or combined first half growth of eight per cent. By then, the sock prices and indices had inched forward. But this was due to GST 2.0 which slashed the tax rates, and reduced the layers. This boosted volumes, and expectations of higher profits despite low margins.

Hence, growth itself did not push up stocks. Other macro factors, which impacted corporate earnings more directly, and in a more meaningful way led to a mini-minor boom. By the end of the calendar year, the indices gave a decent return of 10 per cent. If one considers the returns between January and September 2025, it was near zero. The indices moved in a band, and finished almost where they started from. Similarly, growth is expected to slow down over the last two quarters of the ongoing fiscal year. This may be true in the first half of the next fiscal too. Yet, the consensus is that Indian indices and equities will boom in 2026, as corporate earnings perk up.

Yet another unquestioned axiom about the stock markets is that net inflows and outflows of the money in equities determines their movements. Earlier, from the 1990s to 2010s, foreign flows were crucial. Since, the foreigners owned a substantial portion of the equities, the latter fell when the former withdrew the money, and went up when they pumped in huge amounts. In 2025, although the foreigners were net sellers in the secondary markets, domestic inflows through mutual funds, and SIPs ensured resilience, and the markets did go up in the last three months of the calendar year.

However, the analysis by the DSP Mutual Fund indicates that across the various caps, the fund flows “tend to surge after strong returns, and fade when performance weakens. Even with the massive cumulative FII and DII inflows in recent years, markets have often stalled or corrected, illustrating that flows generally follow returns rather than dictating them.” In effect, the rise of the stocks pushes investors, both foreigners and Indians, to pump in more money, and vice versa. The opposite may or may not be true. It is like manufacturing capacities and investments, which tend to go up after demand is stretched, and supplies are unable to cope up.

Most economists, and policy-makers seem sure that India will become a $30-trillion economy by 2050. Even senior ministers have boasted about it with aplomb and confidence. The whole objective of India@2047 is to reach such an unbelievable GDP target. But the DSP analysis debunks this myth. It states that for India to reach $30 trillion, the GDP will need to grow by nearly nine per cent every year, for the next 25 years. This has never happened in the past. Except for China, and possibly the Asian Tigers for a decade or two, no nation has witnessed such growth for long periods.

A compounded growth rate of nine per cent is not impossible, but it is tough and unimaginable. “With long-term real growth closer to six per cent, and only one five-year period, ending FY-08, approaching the required trajectory,” according to a media report, “DSP argues that a more plausible outcome is nearer to $20 trillion even under optimistic doubling-every decade assumptions.” Thus, reality is vastly different from beliefs, and expectations. However, the GDP size does not really matter. It is only for a pat on the back that we are the third, or second largest economy. What is crucial is the per capita income, and distribution of wealth to negate inequalities.

In its report that decimates 12 widely-accepted myths about stocks, GDP, and investments, DSP tackles several ones that have gained popularity in the recent past. One of them pertains to the widely-hyped thinking that gold is useless, and offers returns that are puny compared to equities in the long run. Several analyses prove that over 50 or 100 years, gold gives small returns. But, in India, only a quarter of the Nifty 500 stocks have “beaten gold on a market-cap-weighted basis” over the past 25 years. Similarly, to accept that due to gold’s rise in the post-pandemic period, it is the game in town, is a fallacy. For long periods, gold remains unmoved before it takes off.