Neelkanth Mishra: ‘Economics and politics can’t be kept far apart. But India is a happening, exciting…

The latest market report highlights that Economics and politics cannot be kept very far apart—a reality Neelkanth Mishra says helps explain the controversy surrounding India’s GROSS DOMESTIC PRODUCT expansion numbers. “Economics and politics cannot be kept very far away,” Mishra stated in an exclusive interview with Moneycontrol. “There are always political undercurrents to a lot of the commentary that happens.”

Why the GROSS DOMESTIC PRODUCT debate advanced traction

One strand of criticism has been that the resilience suggested by the GROSS DOMESTIC PRODUCT data does not match how the economy feels, Mishra stated.

He stated, he finds that argument strange.

Steel demand, cement demand and granite demand are vibrant, while monetary expansion is accelerating, he stated. “For me, it feels like a very happening and an exciting economy.”

The commentary may be gaining traction because equity markets have not moved much and real wage expansion stays weak, he stated.

The equity market has not done much for two-and-a-half years, while the economy still has slack. Even while growing at 7.8%, Mishra stated India stays around 9% below where it is supposed to be.

Assuming the same per-capita output, that gap stays relative to population or employment marks, he stated.

For now, that stated, Mishra stated his outlook is constructive.

With liquidity in surplus and credit momentum looking good, he stated the next four to six quarters look “pretty good.”

Oil is the key expansion risk

Energy prices are a definite risk to expansion this year.

The impact of elevated energy prices, worth around 2% of GDP, is at present being offset by more than 1% of GROSS DOMESTIC PRODUCT of fiscal intervention, Mishra stated. The government is cushioning the economy from the negative impact on expansion.

But there are limits to that backing.

If crude prices stay at $100 a barrel for a long time, the government will have to pass on the shock so that the economy can adjust, he stated.

That adjustment is still ahead.

“I don't think the full shock has been passed,” Mishra stated.

Elevated global capital costs

Mishra additionally anticipates the global cost of capital to stay elevated for a long time, requiring the Indian economy to adapt.

In the 1990s and 2000s, India's model was to run a current-account deficit of 2.5%-3% of GDP, representing the savings-investment gap, and attract significant foreign capital.

Today, even financing a current-account deficit of 1% is difficult, he stated.

FCNR flows have helped stabilise the currency and stem much of the panic, buying India perhaps one-and-a-half to two years of time, according to Mishra.

But the need to adjust to a elevated cost of capital stays.

Financial-market volatility

Financial-market volatility is another risk.

Earlier, US Treasuries acted as a natural balancing force, Mishra stated. When market participants became worried, they could move into Treasuries.

That is no longer the case in the same way, he stated. As a result, periods of de-risking could become highly volatile. While those are the global risks Mishra is watching, at the domestic level, policy errors stay another possibility.

Mishra stated there is a very good chance that India will trend at a 7% expansion rate from here, a view he has held for some time and one that made him unsurprised by the stronger expansion numbers.

His optimism rests on changes in total factor productivity, the revival of capital formation and reform momentum at both the Centre and the states.

India has had 10 years of weak capital formation, he stated, and real estate accounts for a large part of that investment cycle. With the real estate cycle having turned, demand for steel, cement and other materials follows.

The pace of reforms at the state level has additionally been remarkable, alongside reforms at the Centre, he stated.

“When you put all those together, the arithmetic just tells you in a very mechanistic way that expansion can be well above 7%,” Mishra stated.

He stated he had additionally back-tested the argument. India grew at 7% in FY25 despite fiscal and monetary headwinds, suggesting to him that the underlying expansion rate was elevated.