India’s economy, which has shown clear signs of slowing since March, is poised for a potential rebound by February/March, according to Neelkanth Mishra, Chief Economist at Axis Bank. He suggested that cutback in government spending because of elections combined with tightness in monetary conditions caused a marked slowdown in the economy. But the worst may be behind us as government spending is likely to bounce back and liquidity conditions improve in the economy, he added. Mishra was speaking on Axis Bank's The Open Dialogue Podcast.
The slowdown has been visible across various sectors, from cement volume growth to auto sales, consumer goods, and a sharp decline in system credit growth. Mishra points to a rise in non-performing assets, particularly in retail and microfinance sectors, with small businesses struggling. “We have seen a very sharp decline in system credit growth, and there is a significant rise in non-performing assets at the retail level,” Mishra noted, adding that microfinance and small businesses are facing particularly tough times.
Despite the global export challenges, Mishra believes the deeper causes of the slowdown are domestic. “When you see retail credit, MSME credit, microfinance starting to struggle, you know that this is a fiscal and monetary problem,” he said, describing the situation as an unintended contraction in the economy. “It should be cyclical,” he added, “meaning that once we address some of these issues, we should see growth coming back.”
The signs of the slowdown have now been reflected in India’s earnings projections, with earnings cuts being witnessed across the market. “We are starting to see cuts to FY26 estimates as well,” Mishra pointed out. “Just in the first 20 days of this earnings season, we’ve seen BSE 200 earnings fall by more than 2%.” He explained that these cuts, initially confined to FY25 projections, are now extending to the next fiscal year, signaling a widespread slowdown.
Mishra, however, believes the worst may now be behind India. “We have hit the bottom, meaning things are no longer worsening,” he said. According to him, the cyclical nature of the slowdown suggests that the recovery is on the horizon, especially as government spending and the Reserve Bank of India’s (RBI) end to quantitative tightening begin to take effect. "Once government spending starts hitting the economy, we should see the high-frequency indicators improving meaningfully, possibly from February or March," he projected.
The slowdown, according to Mishra, can be attributed to fiscal and monetary reasons. "India is still consolidating fiscally," he said, explaining that the central government deficit is expected to fall from 5.6% to 4.9% this year. State government deficits are expected to remain largely flat, or marginally up or down. However, Mishra highlights a significant factor in the slowdown: the elections. “After late February, when the Model Code of Conduct came in, the cabinet meetings stopped. The files stopped moving,” he said. This created a lull lasting about four to five months, during which government action slowed. “When the files start moving again, the expenditure starts happening,” Mishra explained.
Moreover, Mishra also pointed to changes in key bureaucratic positions. “In some critical ministerial positions, there were personnel changes,” he said. This transition took time, further delaying government action. While bureaucrats are adaptable, Mishra noted that the process of adjusting to new leadership takes time. On top of this, he pointed to the government's fiscal caution, with some buffer spending kept aside in anticipation of new programs, which has yet to materialise.
A key factor in India’s economic recovery will be the surge in capital expenditure (capex), which will increase by 30-35% in the second half of FY24 if the governemnt’s spending targets for the year are to be met. “In the first five months, central government capex was down 19% year-on-year,” Mishra explained. “But now the government has clearly indicated that they will meet their spending targets.” Mishra believes that this means the government will ramp up its spending in the second half, potentially offsetting the underperformance in the first half.
In addition, the government's better-than-expected direct tax collections are helping accelerate fiscal consolidation. “Direct tax collection is doing better than expected,” Mishra said. “If the government wasn’t spending as much as it wanted to, but tax collection is doing better, then basically the pace of consolidation is faster than anticipated.”
While the economy’s recovery may take a few months to fully materialize, Mishra remains confident that the cyclical momentum will kick in, driving recovery in FY24’s second half.
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