Smaller listed companies—those with annual revenues of Rs 10,000 crore or less—turned in a relatively strong performance in the December 2025 quarter. Their operating profits rose 12.2% year-on-year (y-o-y), outpacing the 8.8% growth reported by mid-sized and large firms. Part of the outperformance stems from tighter cost control. While larger companies posted faster topline growth, they also saw a sharper rise in expenses, which diluted profit gains. Smaller firms, by contrast, managed to rein in costs more effectively. With revenues also expanding 12.2% y-o-y, it is encouraging that India’s smaller businesses have been able to tap into the recovery in consumer spending. The question is whether that momentum can be sustained.
Consumption Divergence
Households may continue to benefit from higher disposable incomes and relatively cheaper credit, but aggregate demand could soften, especially given mixed signals from urban and rural markets. Urban spending rebounded strongly in Q3FY26, rising to a seven-quarter high of 8% y-o-y compared with 4.9% in Q2FY26. Rural demand, however, moderated to 5.3% from 7.9% in the previous quarter. Urban consumption has likely been buoyed by rising salaries and wages, increased personal credit, and low inflation.
Yet demand for mid-tier housing remains subdued, and economists expect this softness to persist—hardly positive news for smaller real estate developers or manufacturers of household goods. More broadly, the December-quarter consumption bump may not be durable. A more decisive boost could come only in FY28, when the implementation of the 8th Pay Commission’s recommendations—including arrears—is expected to lift spending.
The moderation in rural demand is somewhat puzzling. Real wages—both agricultural and non-agricultural—have been rising, and credit flows to the sector remain robust. However, these gains appear to have been offset by a decline in government spending on rural schemes. Rural fiscal outlays fell nearly 21% in the December quarter, marking the sharpest drop in three quarters.
In addition, while the terms of trade for agriculture are not severely adverse, they are not particularly favourable either. For rural demand to strengthen meaningfully, farm incomes and real wages will need to improve further, supported by more consistent public spending. This is important as agriculture and allied activities still employ over 40% of India’s workforce. Companies with significant rural or agri exposure could feel the strain if government allocations stagnate.
Tariff Tightrope
Export-oriented small businesses face a separate set of challenges. Elevated US tariffs and uncertainty around the India-US trade agreement have weighed on sentiment. Although tariffs have been lowered, the environment remains unpredictable. Smaller exporters are typically more vulnerable to such volatility. While the government has offered limited support, visibility on US-bound shipments remains weak.
What may provide a buffer for smaller firms—particularly in engineering, chemicals, and electrical goods—is domestic industrial demand. Private-sector capacity expansion is picking up, but a broader capex push led by large corporates would provide stronger tailwinds for ancillary units and small vendors.
Between FY21 and FY25, government capital expenditure was the primary driver of growth; that thrust is now expected to moderate. At the same time, the job market is not expanding rapidly, and disposable incomes are not rising significantly. Taken together, while smaller firms have delivered an impressive quarter, sustaining that performance will depend on a more durable revival in consumption, steady rural support, and a firmer private investment cycle. Without these, business conditions may turn less brisk in the months ahead.