Whalesbook
The Lede
Neelkanth Mishra, Chief Economist at Axis Bank and Head of Global Research at Axis Capital, predicts India's economy will achieve a robust growth rate of 7.5% in the fiscal year 2026-27 (FY27). This optimistic outlook hinges on the anticipated easing of significant fiscal and monetary policy headwinds that have previously constrained economic expansion. Mishra suggests that this environment will allow India's economy to move beyond its long-term trend growth rate.
The past two fiscal years presented considerable policy challenges. In FY25, the economy navigated a period of simultaneous fiscal and monetary tightening. This included explicit fiscal consolidation efforts and indirect tightening through the use of GST compensation cess for off-balance-sheet debt retirement, totaling 130 basis points. Monetary conditions also tightened sharply, with credit growth slowing, creating a drag equivalent to over 2% of GDP. Despite these obstacles, the Indian economy demonstrated remarkable resilience, still managing to grow by 6.5%.
The Core Issue
Mishra highlighted that the economic performance in recent fiscal years was significantly impacted by "unusually strong policy headwinds." For instance, in fiscal year 2024-25 (FY25), the economy faced a dual challenge of fiscal and monetary tightening. Fiscal consolidation efforts amounted to 130 basis points, with 80 basis points directly and an additional 50 basis points indirectly through the application of goods and services tax (GST) compensation cess. This cess was utilized to retire off-balance-sheet debt.
Concurrently, monetary conditions also experienced sharp tightening. This was characterized by a significant slowdown in credit growth, which acted as a substantial drag on the economy, estimated to be over 2% of gross domestic product (GDP). However, the economy's ability to grow by 6.5% in this environment underscores its underlying strength and adaptability.
Financial Implications
Neelkanth Mishra contested the notion that recent tax cuts constituted a fiscal stimulus for the 2025-26 (FY26) fiscal year. He pointed out that the government continued its path of fiscal deficit reduction, bringing it down from 4.8% to 4.4%. This sustained fiscal consolidation meant that fiscal policy remained a drag on aggregate demand.
Mishra elaborated that the tax adjustments did not function as a fiscal stimulus. He stated that until GST rate adjustments neutralized some of the tightening measures, the economy was still encountering headwinds on the fiscal front. Incremental monetary headwinds, however, have largely diminished, according to his assessment.
Analogy Explained
To illustrate the impact of easing headwinds, Mishra employed an analogy involving an aircraft. He described a scenario where an aircraft is flying at a ground speed of 700 kilometers per hour, facing headwinds of 250 kilometers per hour. If these headwinds were to significantly reduce to 100 kilometers per hour, the aircraft's effective speed relative to the ground would increase, allowing it to fly much faster.
This analogy serves to explain why economic growth has surprised many observers. The easing of policy resistance, much like the reduction in atmospheric resistance for an aircraft, allows the economy's inherent growth momentum, or trend growth, to become more apparent and drive higher overall expansion.
Future Outlook
Looking ahead to fiscal year 2027 (FY27), Mishra anticipates a further reduction in fiscal drag. He projects the fiscal deficit to narrow to 4.2%, signifying a consolidation of only 20 basis points. This contrasts with the 40 basis points of consolidation expected in FY26. Complementing this, monetary policy is also forecasted to become more supportive.
Mishra noted the clear direction from the central bank, which he believes will aid in the revival of credit growth. This revival is expected to transition from a drag to a "tailwind," providing a boost to economic activity. Consequently, he believes the economy has the potential to operate above its trend growth rate for a sustained period, leading to the projected 7.5% growth for FY27.
Corporate Earnings
The improving macroeconomic backdrop is expected to catalyze a revival in corporate earnings, which have experienced a prolonged period of stagnation. Forward earnings are projected to see a significant rise of approximately 14% in calendar year 2026. This positive outlook contrasts with the previous year, where gains from roll-forward adjustments were consistently offset by persistent earnings downgrades, averaging over 3% per quarter for index Earnings Per Share (EPS).
Mishra suggests that this downward trend in earnings revisions should reverse as GDP growth stabilizes and economic momentum returns. This rebound is anticipated to be particularly noticeable in sectors that have lagged, such as automobiles and financials. His view is bolstered by bottom-up assessments indicating that key earnings drivers, including financials, IT, industrials, and energy – which collectively account for nearly two-thirds of index earnings – are based on "reasonable" underlying assumptions.
Impact
The forecast of robust economic growth and a subsequent revival in corporate earnings is highly positive for the Indian stock market. Increased economic activity typically leads to higher company revenues and profits, which can translate into stock price appreciation. Investors may see this as a signal to increase equity exposure. The outlook also suggests potential growth in sectors like financials, IT, industrials, and energy, offering specific investment avenues. The overall sentiment is likely to improve, attracting both domestic and potentially foreign investment.
Impact Rating: 8/10
Difficult Terms Explained
- Fiscal Consolidation: The process of reducing a government's budget deficit and debt levels, typically through spending cuts or revenue increases.
- Monetary Tightening: Actions taken by a central bank to slow down economic growth and control inflation, usually by increasing interest rates and reducing the money supply.
- Basis Points: A unit of measure used in finance to denote the percentage change in a financial instrument. One basis point is equal to 0.01% (1/100th of a percentage point).
- Gross Domestic Product (GDP): The total monetary value of all finished goods and services produced within a country's borders in a specific time period.
- Goods and Services Tax (GST): A consumption tax levied on the supply of goods and services, except for those that are tax-exempt.
- Off-balance-sheet debt: Financial obligations that are not recorded on a company's or government's balance sheet, making them less visible.
- Earnings Per Share (EPS): A company's net profit divided by the number of its outstanding common shares. It indicates how much profit is allocated to each share of common stock.
- Roll-forward gains: Adjustments made to financial forecasts or valuations when moving from one accounting period to the next, often involving updating assumptions.