India's Budget 2026: Navigating the Inflation Conundrum
India's economic narrative is about to take an unexpected twist. As Budget 2026 approaches, the country finds itself in uncharted territory, where the once-celebrated low inflation is now a cause for concern.
Here's the catch: Top economists argue that the lack of inflation and sluggish nominal GDP growth are the real threats to India's economy. This shift in focus from real GDP to nominal GDP could significantly impact the upcoming Union Budget and market performance in FY27.
From Fiscal Comfort to Revenue Anxiety
India's recent economic success story was built on low deficits, strong tax collections, and low inflation. But now, economists like Neelkanth Mishra, Sajjid Chinoy, and Gautam Chhaochharia are sounding the alarm.
But here's where it gets controversial: The very factors that were once hailed as economic triumphs are now seen as potential pitfalls. The fear is that low inflation and weak nominal GDP growth could hinder government revenues, corporate earnings, and debt management.
The Macro Playbook Needs a Rewrite
Speaking at a CNBC-TV18 event, these economists outlined why the post-Covid macro strategies may need a rethink. The disinflation that was once welcomed is now a source of worry.
The elephant in the room: China's massive excess manufacturing capacity. With a 5% growth target and weak domestic demand, China continues to export deflation, particularly to Asia. This external pressure keeps inflation low, impacting pricing power and nominal GDP growth in India.
The Credit Cycle: A Silver Lining?
Neelkanth Mishra offers a more optimistic view, focusing on the credit cycle. He argues that monetary easing is taking effect, with credit growth accelerating. This, he believes, will boost real growth and earnings.
And this is the part most people miss: While the economists agree on the importance of nominal GDP, their predictions differ. Chinoy forecasts a more conservative real GDP growth of 6.5%, while Mishra sees it exceeding 7.5%.
Commodity Prices and the Inflation Puzzle
China's influence extends to commodity prices, with ferrous metals and iron ore expected to soften. Low food prices also contribute to disinflationary pressures, complicating fiscal planning and earnings forecasts.
Earnings Revival: How Much is Enough?
The market's focus is on earnings growth. Gautam Chhaochharia suggests that a pickup is likely, but the question is by how much. Will it be a modest 10-12% or a more robust mid-teens percentage?
Controversy alert: The answer may lie in the banking sector's risk appetite. India's well-capitalized banks are showing signs of loosening credit standards, which could unlock stronger investment and earnings growth. But is this a sustainable trend?
