Fiscal drag is easing, deregulation poised to spur growth: Neelkanth Mishra

New Delhi: India’s growth headwinds from the central government’s planned fiscal consolidation are easing, and the current economic slowdown appears cyclical, with the government’s deregulation drive poised to spur growth, Neelkanth Mishra, chief economist at Axis Bank and head of global research at Axis Capital, said on Friday.

Speaking at the Mint India Investment Summit, Mishra said the government was capable of supporting growth and exceeding its deficit targets despite fiscal consolidation.

While government spending in 2023-24 was front-loaded, spending during this financial year has been back-loaded and could drive rapid growth in the final quarter, he added. “It is clear that there was a major drag to growth during FY25, but its impact will ease going forward,” said Mishra.

He added that further rate cuts may be less effective because the Reserve Bank of India has kept liquidity too tight for too long.

RBI kept its key interest rate unchanged at 6.50% for nearly two years, spanning 10 consecutive policy meetings since February 2023. In February this year, however, RBI introduced a 25 basis point cut, bringing the rate down to 6.25%.

To be sure, India’s economic growth has slowed from last fiscal year but the country remains the fastest-growing major economy, with real GDP expanding 8.2% in FY24 and projected to grow 6.5% in FY25, according to the National Statistical Office (NSO).

Growth rebounded to 6.2% in the December quarter, up from 5.6% in the preceding three months, driven by increased government spending and festive-season consumption. But achieving the revised full-year GDP expansion target of 6.5% will require 7.6% growth in the final quarter.

Navigating post-multilateral era

Mishra also stressed the need for India to embrace bilateral trade deals globally, as the era of multilateralism wanes, with US reciprocal tariffs set to take effect from 2 April, potentially marking the start of this shift.

“So I think this is the start of a period, a prolonged period of uncertainty,” he said. “However, there is not too much of a threat of US imports coming in, except for maybe some agri commodities and a few others.”

India’s goods exports in April 2024–January 2025 inched up by 1.39% year-on-year to $358.91 billion, while imports grew 7.43% to $601.90 billion, resulting in a trade deficit of $22.99 billion as of January 2025, according to commerce ministry data.

Along with slowing global trade and an economic downturn in advanced economies, US President Donald Trump’s reciprocal global tariffs could further disrupt several markets, including India.

As things stand, the US remains one of India's largest trading partners, with bilateral goods trade standing at about $129.2 billion in 2024.

India can't rely on exports as a primary engine for growth for an extended period, Mishra said.

“When you are an economy the size of China or India, net exports can drive growth maybe for a temporary period. This is what happened to China between 2000 and 2008,” he said. “But on a sustainable level, we have to tap into our domestic demand.”

Towards a leaner government

On deregulation, Mishra highlighted significant progress over the past decade and noted that further deregulation, as proposed by the central government in the Budget for 2025-26, would benefit the industry—particularly micro, small and medium enterprises.

He also emphasized that government decision-making had become considerably faster in recent years.

Mishra also said that as the world enters an era of industrial policy competition, the end of multilateralism means that every tool of industrial policy will be deployed globally. These include measures such as weak currencies, labour subsidies, capital subsidies, and directed credit, among others.

“The government then needs to be much leaner and much more focused on the problem areas,” he said.

Citing sectors such as batteries, chemicals, and fertilizers, Mishra said India lags China by 10-15 years, with limited fiscal support and fragmented decision-making across several ministries, making the process inefficient.

Viability of PLI schemes

Mishra said there were lessons to be learned from the government’s production-linked incentive (PLI) schemes, and that its decision not to renew some of them was appropriate as the schemes often failed to align with their intended objectives.

“But remember that this is also the right message. Unlike some of the earlier incentives which lasted till perpetuity, that you start with an end date, but you don’t stop it. That makes the industry lazy,” he added.

According to a recent Reuters report, the central government has decided not to extend its $23 billion PLI programme, aimed at boosting domestic manufacturing and reducing dependence on China, beyond the initial 14 pilot sectors, with no extension of production deadlines despite requests from some participating firms.

Dollar to stay reserve currency

Mishra said it would be unwise to expect the US dollar to lose its status as a reserve currency within the next three to five years.

However, over a longer horizon of 15-20 years, he said that a higher likelihood of countries holding reserves in non-dollar assets and a significant portion of global invoicing being conducted in other currencies.

“I am not expecting that the dollar will be replaced as a reserve currency anytime soon,” he said.