Economic forecasters are emerging from denial and cutting projections. Even politicians are publicly admitting growth will be low for several years. Indian GDP growth estimates for 2008-09 are now around 6.5 per cent, according to consensus. That is still optimistic.

There is a link between corporate results and the performance of services and manufacturing, which together generate over 80 per cent of the GDP. The listed economy operates across this spectrum and generally outperforms the overall economy.

Corporate results in the second quarter of 2008-09 have slowed down and EPS estimates for the second half have been sliced dramatically. In a recent advisory, Motilal Oswal sharply reduced Sensex EPS estimates.

The financial advisory estimates the Sensex EPS will grow 8.6 per cent, down from earlier estimates of 21.5 per cent growth. Excluding contributions from new businesses (Reliance Industries' [Get Quote] gas), growth is 7 per cent.

This nominal 7 per cent EPS growth (or 8.6 per cent, for that matter) is negative if the numbers are adjusted for inflation as with the GDP. The implications are confirmed when we look at the Nifty EPS on the NSE website.

In November 2007, the Nifty EPS was 3 per cent higher than that in November 2008. Post-inflation, this negative EPS trend is pronounced. Projecting forward, it strongly suggests corporate India will suffer inflation-adjusted EPS reduction in 2008-09.

The last time this happened was in 1991-92. That year, the GDP growth dropped below 1 per cent, inflation was over 20 per cent and the economy was adjusting to the impact of liberalisation and the overhang of the balance of payments crisis. We cannot compare 1991-92 with 2008 since listed companies of that era were far less representative of the overall economy.

Since then, at cyclical bottoms, the GDP growth has levelled off between 4 and 5 per cent and corporate EPS growth has been about 12 per cent higher in the 'bust year.' Given that inflation has run at 8-12 per cent, listed companies normally outperform the economy.

If that is true, and the current trend is not a statistical anomaly, the implications are scary. If the corporate economy actually outperforms the overall economy, as it tends to, the GDP growth is liable to go into the red or drop to near-zero.

Nobody is predicting that. But it's difficult to find reasons why there would be a massive dichotomy between GDP growth and corporate growth. Agriculture, which comprises less than 20 per cent of the GDP, cannot outperform to such an extent that it pulls the overall economy into the black when services and manufacturing are flat.

The market, which is a leading indicator, has already responded in a manner that suggests its expectations are lower than official estimates. The Nifty is 51 per cent lower than its November 2007 levels and hundreds of individual stocks are down by much more. The listed real estate sector is down by close to 90 per cent from its peaks.

According to Motilal Oswal (and others), cement, real estate and metals would all be down in 2008-09. Commodities, in general, will do badly across the globe. NTPC and SBI [Get Quote] are the only Sensex stocks that are likely outperformers in the next two financial years.

The most massive EPS downgrade is in Tata Steel [Get Quote], closely followed by Tata Motors [Get Quote]. FMCG and IT could remain consistent performers in 2008-09, with IT easing off in 2009-10. Assumptions of a rebound in 2009-10 are dependent on Reliance getting its gas production off the ground by January-March 2009 and the gross refining margins also remaining reasonable for RIL.

In terms of valuations, current index PBV ratios, dividend yields and PE ratios are all in zones where it has made sense to be a buyer historically. The question is, will the market fall further? I think so on the grounds of political instability, if nothing else.