MC Exclusive: Markets according to Mishra -- Neelkanth Mishra. On capex, consumption, deficit, dollar, earnings, valuations and returns

The announcements for power capacity have already been made, but investments have just begun. For the next 3-5 years, the focus should be on urban infrastructure, which is gaining traction.

The Union Budget gave markets some good news and some bad news. The tax breaks came as a huge positive surprise while the muted capex spending target for FY26 came as a bit of a dampener. While the proposals have brought hopes of a bounce back in earnings for FY26, stocks are still not dancing to an upbeat mood as uncertainty around Trump policy and quarterly results seem to be weighing them down. Neelkanth Mishra, Chief Economist, Axis Bank and an authoritative voice in India’s economic policy-making spoke to Moneycontrol exclusively on a wide range of questions on the economy and markets.

Edited excerpts:

What changes after the budget from a market perspective?

Not much. The only surprise was that the government found the space for one lakh crore rupees in tax cuts. The COVID bump in deficits has largely been moved out. By FY 2031, the target for debt-to-GDP is expected to range between 48% to 52% from the current 56%. In the worst case, the government may not consolidate much further, but in the best case, we could see a reduction of 15-20 basis points per year. But overall, the aggressive pace of fiscal consolidation is over. For markets, nothing changes. The improvement in fiscal certainty may justify a slightly higher P/E multiple.

Were you surprised at the muted FY26 capex target?

Comparing FY 2019 to FY 2026, two key changes are that personal income tax-to-GDP and capital expenditure-to-GDP have both increased. The problem the government is facing is the lack of absorptive capacity for central government capex. The government can only spend on national highways, railways, defense, telecom, major ports, and airports, but most of these sectors don’t require much capex anymore. That’s the reason they decided to return some of the extra funds to taxpayers instead of distorting the economy further.

Also read: Why will markets remain flat and what could trigger growth ahead? Neelkanth Mishra weighs in

This is assumed to boost overall consumption – will it?

I don’t think so. The fiscal deficit as a percentage of GDP falls from 4.8% to 4.4%. The government is actually being a drag on growth by reducing aggregate demand. Capital expenditure as a percentage of GDP is going to remain flat. Forget about the earlier projections; the government’s actual expenditure is already behind the curve. In the first nine months of the year, even with the revised down estimates, government expenditure was low. However, in the last three months, government capex grew by 21% year-on-year, and in December, capex was up 95% year-on-year. So, aggregate expenditure will decrease as a percentage of GDP, so consumption is not likely to get a boost. I’m quite surprised by how the market seems to be interpreting this.

But taxpayers are getting this extra money from tax savings, which will trigger consumption…
Personal income tax-to-GDP is still expected to increase by FY 2026, despite the tax cuts. From a market perspective, how the 70-75 lakh people who fall in the Rs 12 lakh to Rs 50 lakh tax bracket and are the biggest beneficiaries of these tax cuts, will use that discretionary income.

Which areas will see an uptick in consumption?

These people are in the 90th percentile of Indian households. For them, their consumption is focused less on staples and more on high-value discretionary items. While it’s not considered part of household consumption expenditure, the real estate market will likely benefit. While some of this boost will go into savings, a significant portion will also likely be spent on purchases like cars, jewelry, etc. The effect on staples or other consumption categories might not be significant.

Strangely, banks have not responded positively.
One reason for that could be the uncertainty around the global economy. For banks, the bigger issue right now is the uncertainty surrounding monetary policy. There’s a lot of market expectation for rate cuts in the upcoming MPC meeting, but I personally think it would be premature to cut rates now, as it might undermine the credibility of inflation-fighting efforts.

Do you think "animal spirits" in private investments can really come back this year?

It’s essential to understand why investment fell in the first place. Gross fixed capital formation, which measures investment activity, fell from 34% in 2012 to 27% in 2021. A significant portion of this decline, around 5%, was due to reduced household investment in real estate. A large part of the rest was power sector investments and manufacturing that feeds into real estate. If we break it down, the downturn in the real estate and power generation sectors was a primary factor in this (falling investments). These cycles are now starting to turn around, which could drive growth.

The government’s fiscal slowdown during the election year also played a role, but spending is starting to pick up now. On the other hand, the central bank’s tightening on credit-deposit ratios inadvertently slowed overall credit growth. While it was necessary to control certain segments of the credit market, the broader slowdown from 17% to 11% growth in credit was problematic. If we can reverse that trend, the growth outlook could improve significantly. The key to reviving private-sector capex is ensuring enough liquidity in the system, as the underlying demand trends are supportive. However, global turbulence still poses a significant risk.

Going back to capex, have themes like roads and railways run their course from a stock perspective?

The railway sector can indeed see significant growth in spending. If you recall, in 2014, the plan was to increase spending from around half a trillion to 2.5-3 trillion rupees by 2019. But the issue with railways is its bureaucracy. It’s historically struggled to execute large contracts and tenders. That said, there’s been a push for process improvements within the railway ministry. They’re starting to tackle these challenges, and the capacity to absorb more spending is improving. Moving from spending Rs 1-1.5 lakh crores per year to 2.5 lakh crores is a big leap. There’s potential for unlocking an additional Rs 10-11 trillion in projects. The primary challenge here is not fiscal capacity or funds, but the railways’ ability to execute these projects efficiently.

How about power?

The announcements for power capacity have already been made, but investments have just begun. For the next 3-5 years, the focus should be on urban infrastructure, which is gaining traction. The budget allocates a significant amount, with the potential to trigger up to Rs 4 lakh crores in capex through competition among states. This is a clear area for growth. Within industrials, the focus will shift to construction – like machinery, materials, cement, etc. – rather than manufacturing. With excess capacity in China, the likelihood of very large, capital-intensive projects coming up in India is slim… other than maybe in strategic areas like semiconductors. But, mostly, if we do get manufacturing, it will be labour-intensive manufacturing.

Also read: China’s loss not India’s gain: tariff wars are bad for everyone, India included, says Neelkanth Mishra

How do you interpret the impact of Trump tariffs on Indian markets?

There are so many moving parts and so many layers… but overall, it’s not good for anyone. If anyone is under any illusion that these tariffs somehow help India, I think they are mistaken. Normal wars, while they are very bad for lives and livelihoods in some specific areas, can actually be a boost to the economy. The First World War, for three or four years, was a big boost to the US economy. The Second World War also, because most of the damage happened in Europe, they actually benefited from trade. But, these are wars where the objective is economic damage. You see even the US government statements; they say that they are willing to accept some damage. In fact, there are theoreticians who are saying that this is like mutually assured destruction.
So the first thing is, this hurts everyone. It’s bad for growth. Secondly, there is involuntary contraction because, as prices go up, demand falls. The third is just the uncertainty -- if you're setting up a factory anywhere in the world, you would say, 'You know what, let me hold back.'

As for foreign selling in Indian markets, will it continue in this environment?

Yes, so the dollar strengthening is not so much because of any expectations on the balance of payment changes. Frankly, that's too hard to forecast at this stage. Yeah, but it's just de-risking. People want to get into safe assets, or what was considered to be safe assets 20 years ago. So these are muscle memories of the markets that whenever there is uncertainty, you dump all the speculative back of the dollar, and then money goes back to the dollar and to gold. I mean, gold is behaving much better, which again, shows that people are really becoming risk-averse. So that is the strength of the dollar, which I think will be temporary. Once some certainty emerges, and people see how this dust may settle, which could take three to six months, then, this reversal starts as well. Because, as you were rightly saying, this is contra to what the US government really wants.

Also read: S Naren on market sentiment: Retail investor activity set to cool; overvaluation can result in significant undervaluation eventually; expectations of major shifts post-Budget

What's your take on Indian markets for 2025?

The first thing is the headline, I don't think we will go anywhere, although I do expect that the underlying earnings will keep improving. We will see a time correction that we've been anticipating now. I was maybe 10 months too early in calling for a peak; the market ran for a lot longer. But now the potential growth acceleration in India is now behind us, a P/E expansion is unlikely. What has also happened is that given the high prices, the supply of equity is very high. So even this year, there is going to be seven and a half lakh crores of supply in terms of promoter selling, IPOs, block trades, etc., whereas the demand is only about six lakh crores. So, on both these fronts, the PE multiple doesn't go anywhere. The enhanced global uncertainty means that the PE multiples come off even more.

The underlying demand or the earnings should grow because demand drivers are largely domestic. This is the headline approach. But if something really bad happens in the trade war, maybe there is a deeper swoon in the market correction, that should be bought into. But within sectors, I would say that the channel through which growth can really be boosted is credit. Because, there is not much scope for fiscal action. Given elevated inflation, there is not much scope for interest rates to come down. But there is a lot more scope to get credit growth back closer to where it was before the slowdown started. And so, the channel for that would be the financials.