Neelkanth Mishra, the Chief Economist at Axis Bank and Head of Global Research and Whole Time Director at Axis Capital, expressed that the Indian economy may have reached its cyclical low point, suggesting that the most challenging phase for economic growth might be over. The economy’s potential growth rate remains around 7%, based on the frameworks of labor input, capital input, and total factor productivity. With the revival of the real estate sector and the need for new power plants, the investment cycle appears robust, indicating no fundamental structural issues. However, enhancements in fiscal spending and some monetary easing, particularly on the quantitative side, are necessary.
Mishra, when questioned about the current economic conditions, stated definitively that the economy is not in a favorable state. High-frequency indicators, such as auto sales, cement sales, and power demand, have been experiencing a significant slowdown. The weaker credit impulse compared to previous years raises concerns about whether this slowdown is merely cyclical or more profound. Although government spending has recently begun to recover after a poor start to the fiscal year, monetary conditions have remained weak, with banks reducing lending activities. The Reserve Bank of India (RBI) has since maintained overnight liquidity in surplus and signs of deposit growth resuming have emerged, suggesting a temporary slowdown.
Regarding the potential structural slowdown, Mishra reiterated that the worst of the growth phase may have passed, emphasizing the economy’s capacity for 7% growth. He highlighted the importance of fiscal spending and monetary easing to support the economy.
Discussing government spending, Mishra noted that both central and state governments experienced fiscal slowdowns. However, signs indicate improvement, with state spending recovering and central revenue expenditure showing a pickup. The investment cycle in private sector capital expenditures is dependent on demand revival. From 2012 to 2021, household investment in real estate accounted for a significant portion of the decline in investment-to-GDP ratios. Indicators such as expansions in steel and cement industries suggest potential demand growth, contingent on an economic upswing.
Looking ahead to monetary easing, Mishra does not expect interest rate cuts before April. Despite some anticipation of a rate cut in December, comments from the monetary policy statement suggest otherwise. Current inflation rates, particularly food inflation, provide limited room for rate cuts. However, on the quantitative side, the RBI appears to be easing liquidity conditions, which could ease competition for deposits and stimulate credit growth in the coming months.
On the topic of inflation, Mishra acknowledged that food inflation is influenced not only by supply factors but also by strong demand, partly driven by income transfer schemes announced by various states. These transfers, amounting to significant sums, are benefiting low-income segments of the population, further fueling demand.