Economy resilient despite fiscal tightening, US tariffs, says economist Neelkanth Mishra

The Centre has reduced its fiscal deficit substantially over the past few years—by 80 basis points (bps) in FY24, 80 bps in FY25, and another 40 bps in the current year’s budget, said Mishra, who is also head of global research at Axis Capital.

On the monetary side, however, credit growth slowed sharply from 16.3% in March 2024 to about 9.8% in May 2025, Mishra said in an interview. “Given that bank credit equals about 56% of GDP, this slowdown shaved off around 2-3 percentage points of growth," he said. “A significant portion of this was unintended, resulting from tight liquidity driven by slow base-money injection and intervention in foreign currency markets. The capping of LDR ratios for banks also contributed."

Conditions are easing now. “The Reserve Bank of India (RBI) has softened its stance, and fiscal drag is also reducing. In fact, we now have a fiscal stimulus of about 0.5% of GDP from GST cuts. Taken together, the likelihood of India’s growth surprising on the upside going forward is quite high," he added.

Mishra downplayed the risks on the US tariff hike, saying “The 50% tariff is more of a negotiating tactic, and unlikely to last. Even if tariffs remain at 25%, the impact is limited," he said.

At 25%, Indian exporters would pay about $18 billion in duties versus $12 billion at 15%. "That $6 billion difference is small in the context of a $4 trillion economy. Further, much of this is likely to get passed on to US importers and consumers," he added.

Commodity prices

Mishra expects global commodity prices to see some volatility, especially with several countries likely to attempt currency debasement.

“Precious metals are already reflecting this. But China’s slowing economy and excess industrial capacity should help keep prices in check. So we don’t expect sustained upward pressure, though volatility will remain a feature of the coming years," he said.

“Core inflation remains stable and close to target. Headline inflation has fallen sharply as vegetable and pulses prices moved below trend after two years of strength," he added.

Monetary easing

On monetary policy, Mishra was cautious about expectations of aggressive easing. “Another 25–50 basis point cut won’t solve much. The problem isn’t interest rates but credit appetite—it remains weak for both lenders and borrowers. It’s better to wait and see the impact of the 0.5% of GDP fiscal stimulus from GST cuts before acting further," he said.

He predicted that if growth disappoints significantly, the RBI may consider cuts, but given the strong Q1 numbers, it’s more likely that the central bank will wait until clearer signals emerge.

Investments and capex

“Corporate investment for BSE 200 companies grew 13% in FY25, faster than GDP. Real estate, which had slowed due to tight monetary conditions, is poised to recover as liquidity normalises. Corporate cash flows are strong, debt and tax costs are low, and M&A activity is rising. This suggests private investment will strengthen going forward," he added.

Mishra expects the Centre’s capex to stay around 3.2% of GDP, in line with guidance, but sees that figure as less decisive. “What matters is the trajectory of real estate and private investment, which will determine the overall investment ratio," he said.

On fiscal policy, he underscored the government’s credibility in sticking to its targets. The Centre met its FY26 fiscal deficit goal of bringing the gap to below 4.5%, and is now focused on reducing debt-to-GDP from 57% to 50% by FY30. “This commitment should be taken seriously," Mishra added.

GST rejig

The recent GST rationalization, he said, has three clear implications: it provides a demand stimulus worth about ₹1.8 trillion, requires little additional borrowing since the compensation cess has been folded into GST, and simplifies the structure, plugging leakages, reducing inverted duty risks, and encouraging formalization.

While companies’ pricing responses will vary by sector, competition and market forces will ensure a large share of rate cuts reach consumers, he said.

Mishra also flagged risks from states’ stretched balance sheets, with several carrying debt-to-GSDP ratios above 40%.

High debt limits flexibility and crowds out spending on health, education, and infrastructure, he warned.

“Systemic stress is unlikely as the Centre regulates state borrowing under Article 293, but ultimately, it is for states to exercise discipline. States that over-borrow will be forced by fiscal stress to tighten later, as we have seen historically," he added.

Looking forward, Mishra noted that while competing with China remains challenging, especially after an 18% fall in its real effective exchange rate over the past three years, India is well positioned to benefit from diversification in global supply chains.

“India’s states are competing well with incentives, land, power and law-and-order stability," he said.

“The recent 50% tariff issue may have created doubts, but if duties normalise, India can remain in the game, especially in labour-intensive sectors," he added.