A bull run is usually driven by a cyclical economic upswing combined with a low starting valuation. India is not a compelling case on either of these two counts. India’s domestic demand story remains fragile. Even as tweaks to goods and services tax (GST) have created episodic consumption bumps, the drivers of underlying purchasing power are missing. Wage growth, particularly in rural India, has been weak or stagnant for the past few years, when adjusted for inflation. This has constrained mass consumption. Weak wage growth matters more than headline gross domestic product (GDP) growth for equity markets because it drives volume expansion. Without real-income growth, demand relies on credit expansion or government transfers — both volatile drivers. That partially explains why growth in corporate earnings has lagged headline GDP growth. The consequences are visible in private corporate capital expenditure (capex), which has remained cautious since the twin balance-sheet crisis of the late 2010s. Even though balance sheets are healthier now, capacity utilisation has only gradually improved, and companies remain wary of building excess capacity in an uncertain demand environment. India’s uninspiring equity underperformance last year reflected moderate earnings growth and weak demand.
Trade normalisation should help export-oriented sectors in which India is already competitive at the margin — textiles, generic pharmaceuticals, parts of specialty chemicals, and engineering exports. But none of these is a new growth engine; rather, these are beneficiaries of global trade reopening. India’s share in global merchandise exports has hovered around low single digits for years even during the hyper-globalisation era. Despite two decades of global integration, India has struggled to scale up manufacturing exports the way China or Vietnam did due to logistics costs, regulatory friction, gaps in labour productivity, and supply-chain depth. Trade deals reduce barriers, but they do not create competitiveness. The excitement of two mega trade deals has pushed the macro picture — low domestic demand and export competitiveness — away from the headlines, for now.
This leaves one dominant growth engine. Government capex has become the central pillar of India’s growth model. The Union Budget for 2026-27 (FY27) has pushed public capex to above ₹12 trillion, the fourth year of the largest infrastructure push in India’s history. But there are two caveats. First, infrastructure spending brings direct benefit only to businesses participating in government-funded projects. These are only a few smaller listed stocks. Second, allocation is not execution. The audit data repeatedly highlights structural inefficiencies. One review of the Comptroller and Auditor General (CAG) found cost overruns of ₹1.07 trillion across 442 projects, with delays stretching up to 16 years. In infrastructure audits, project delays have ranged from three to 39 years, with cost overruns in extreme cases exceeding 3,000 per cent. These numbers matter because infrastructure spending works only if productivity gains materialise. Otherwise, capex becomes a fiscal stimulus without long-term growth multipliers.
If there is less to cheer by way of organic, demand-led growth, that has not dampened optimism among smart Indian investors, especially in smallcaps. But here comes the second challenge to that optimism: Valuation. After a brutal correction in 2025, valuations have reset in parts of the segment. The small and midcap indices fell sharply during riskoff phases last year, mirroring broader foreign outflows and domestic liquidity tightening. This has created the perception that a cyclical bull run could emerge if liquidity returns and domestic investors re-risk. But it is also conditional on earnings revival to match the current valuation. India’s equity market has traded at a premium to other emerging markets for more than two decades, reflecting superior corporate governance perceptions, and a stronger return on equity and structural growth expectations. But that premium has widened in recent years. Forward price-to-earnings multiples for MSCI India have been roughly double those of other emerging markets in some periods. Even after recent corrections, India continues to trade at a high premium to peers and, in some cases, remains the most expensive major market globally on forward earnings multiples.
That valuation gap partly explains why the MSCI emerging markets index significantly outperformed Indian equities last year, with some estimates showing emerging-market returns exceeding India by more than 20 percentage points. Meanwhile, Indian equities delivered near-flat relative performance, reflecting high starting valuations and modest earnings growth. The structural premium for India is logical. India offers political stability, deep domestic capital markets, and favourable demographics. But high valuation demands continuous earnings growth. When earnings slow — even briefly — relative underperformance follows. This is where blanket optimism about smallcaps would get tempered by reality. Liquidity-driven rallies can occur, but sustained bull markets in India need earnings compounding because valuation re-rating has happened in advance.
The overall takeaway is this: Trade deals reduce downside risks; they do not automatically create growth. India’s structural constraints — export competitiveness, uneven wage growth, and cautious private investment — remain largely unchanged. All indices have been flat to down since the first hour’s excited rally on Tuesday following the US trade deal. We may get tactical rallies, especially in beaten-down small caps, but until real incomes accelerate, demand revives strongly, private capex broadens, and earnings growth rebounds, valuation will act as headwinds.
The writer is cofounder of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers
 "stock market trading")