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

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

Economics and politics cannot be kept very far apart—a reality Neelkanth Mishra says helps explain the controversy surrounding India’s GDP growth numbers. “Economics and politics cannot be kept very far away,” Mishra said in an exclusive interview with Moneycontrol. “There are always political undercurrents to a lot of the commentary that happens.”

Why the GDP debate gained traction

One strand of criticism has been that the strength suggested by the GDP data does not match how the economy feels, Mishra said.

He said, he finds that argument strange.

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

The commentary may be gaining traction because stock markets have not moved much and real wage growth remains weak, he said.

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

Assuming the same per-capita output, that gap remains relative to population or employment levels, he said.

For now, however, Mishra said his outlook is constructive.

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

Energy prices are a definite risk to growth this year.

The impact of higher energy prices, worth about 2% of GDP, is currently being offset by more than 1% of GDP of fiscal intervention, Mishra said. The government is cushioning the economy from the negative impact on growth.

But there are limits to that support.

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

That adjustment is still ahead.

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

Mishra also expects the global cost of capital to remain 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 said.

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 higher cost of capital remains.

Financial-market volatility is another risk.

Earlier, US Treasuries acted as a natural balancing force, Mishra said. When investors became worried, they could move into Treasuries.

That is no longer the case in the same way, he said. 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 remain another possibility.

Mishra said there is a very good chance that India will trend at a 7% growth rate from here, a view he has held for some time and one that made him unsurprised by the stronger growth 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 said, 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 also been remarkable, alongside reforms at the Centre, he said.

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

He said he had also back-tested the argument. India grew at 7% in FY25 despite fiscal and monetary headwinds, suggesting to him that the underlying growth rate was higher.

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