What you should know about India's 'good' problems

India's corporate and banking sectors have come a long way. In 2016-17, the Economic Survey highlighted a twin-balance sheet problem for India's economy. There was a crisis in the balance sheets of corporates and banks. Public sector banks unveiled stressed assets that unleashed a slowdown before the Great Pandemic hit the economy.
Cut to the present day, and you will notice that corporate and bank balance sheets are more robust than ever. The latest analysis by ICRA, a credit rating agency, shows that The Insolvency and Bankruptcy Code (IBC) is helping drive a change in the behaviour of borrowers and improving lenders' recovery. That is boosting the balance sheets of banks. Despite tepid credit growth, banks can maintain a strong balance sheet.
Similarly, companies are sitting on record profits as a percentage of gross domestic product. They are utilising the money to repay debt. Businesses have already increased dividend payouts besides the buyback of shares. Companies either pay shareholders more cash, issue bonus shares, or both. That has enthused investors, and share prices are already near record highs. It is likely to continue to attract investors.
The bad news about the good news
Indian equity valuations are significantly higher than those of other key markets. While domestic mutual fund investors continue to support Indian listed companies with new money gathered every month, foreign portfolio investors are treading with scepticism. They are pulling out money at every new peak share price touch. A primary reason is that the external environment is getting difficult. Despite all the rhetoric about India turning into a manufacturing hub, the troubled geo-political situation and the US trade policies are likely to make job creation difficult.
The latest minutes of the monetary policy committee quotes a survey of corporate performance that shows companies are paying off the debt with rising profits. Their capacity utilisation is above 75%, but the investment intentions have moderated in 2025-26. That means businesses do not want to invest in expansion. That causes a slowdown as fewer jobs are created.
A primary reason for urban consumers' inability to spend more is worries about future income. If you live in a city, you are trying to meet all your expenditures and allocate money for your future. There is little space for ambition or early retirement due to a lack of income growth.
The survey of corporate performance shows that companies are deleveraging their balance sheets with rising profits. Companies choose to pay back banks and reduce their interest burden with increased profits. Despite the capacity utilisation crossing beyond 75%, the investment intentions in manufacturing have moderated in 2025-26.
The government will have to support the industry with further fiscal measures, and the RBI will have to focus on bringing down borrowing rates and take other measures that ease liquidity further in the financial system. It also shows the thinking about demand prospects. Experts are waiting and watching the impact of a cut in the personal income tax rates announced in Budget 2025. There is hope that it will leave more money in your hands to spend and revive the demand for consumption.
What it means to your money
There is a reason not to risk your money at this stage. Gold prices are near a record high. Share prices have continued to remain near historic highs. Most pundits advocate a 'bottom-up' investment approach. That means identifying companies with strong balance sheets and not trading at record highs. It is easier said than done for fund managers at institutions where they have access to a lot more information than you do. It is the right time to review investments towards your long-term goals. If share prices are consolidating, stronger balance sheets will ensure they get the necessary momentum for the next structural rally.

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