Neelkanth Mishra says fiscal consolidation is important; other factors to help economy

Neelkanth Mishra, Head of Global Research at Axis Capital, in an exclusive chat with CNBC-TV18 ahead of Budget 2024, discussed his view on the Indian government's fiscal consolidation strategy and its implications for the economy and market stability.

Mishra emphasised the importance of the government's commitment to reducing the fiscal deficit from 5.9% to 4.5% by FY26. He highlighted two possible approaches: a gradual reduction of 70 basis points (bps) each year or a staggered approach with a reduction of 50 bps followed by a more substantial reduction in subsequent years. One basis point is a one-hundredth of a percentage point or 0.01%.

Mishra said while the level of fiscal deficit itself does not directly impact gross domestic product (GDP) growth, it's the change in fiscal deficit that influences economic growth. Despite fiscal consolidation efforts in FY24, which saw a 50 bps reduction, India's GDP still maintained a robust growth rate of around 7%. Mishra attributed this resilience to the economy's strong momentum.

He suggested that while the Indian economy could withstand moderate fiscal consolidation, more aggressive measures could potentially stimulate stronger growth. However, Mishra cautioned that in the event of global economic instability, particularly in the US, the government might need to increase fiscal support. Therefore, maintaining flexibility in fiscal policy is essential to address any unforeseen challenges.

Ashish Gupta, Chief Investment Officer at Axis Mutual Fund, echoed Mishra's sentiments regarding the market's expectations. He noted that the market has already priced in a fiscal deficit target of 5.3-5.4%, and minor deviations are unlikely to significantly impact market dynamics.

Gupta said it's important to consider both demand and supply factors in the bond market, including investor appetite and the Reserve Bank of India's open market operations (OMOs).