Mishra said the past two fiscal years were marked by unusually strong policy headwinds. In 2024-25 (FY25), the economy faced “simultaneous fiscal and monetary tightening,” with fiscal consolidation of 130 basis points—80 basis points explicitly and another 50 basis points through the use of goods and services tax (GST) compensation cess to retire off-balance-sheet debt. Monetary conditions also tightened sharply as credit growth slowed, creating a drag of more than 2% of gross domestic product (GDP). Despite this, the economy still grew 6.5%, underscoring its resilience.
For 2025-26 (FY26), Mishra rejected the view that tax cuts amounted to fiscal stimulus, noting that the government continued to reduce the fiscal deficit from 4.8% to 4.4%, keeping fiscal policy a drag on demand. “The tax cuts were not a fiscal stimulus…the economy this year, till the time that the GST cuts happened, which actually kind of neutralised some of this tightening, the economy was still facing headwinds on the fiscal side,” he said, adding that incremental monetary headwinds have largely faded.
Mishra likened the easing of headwinds to an aircraft facing less resistance. “If an aircraft’s ground speed is 700 kilometres an hour and there are headwinds of 250 kilometres an hour, if the headwinds fade to 100 kilometres an hour, what will the aircraft fly at?” he said, adding that this explains why growth surprised many observers. “We expected that as the headwinds ease, the trend growth will start showing up.”
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Looking ahead to FY27, Mishra expects fiscal drag to ease further as consolidation slows. He projects a fiscal deficit of 4.2%, implying consolidation of just 20 basis points, compared with 40 basis points in FY26. Monetary policy is also likely to turn supportive. “The fact that there is now a firm vision or message from the central bank, I think, credit growth is starting to revive. That can become a tailwind. So, we can run the economy above trend for a while, and that is why we are at 7.5%,” he said.
The improving macro backdrop is expected to revive corporate earnings after a prolonged period of stagnation, with forward earnings projected to rise about 14% in calendar year 2026. Over the past year, roll-forward gains were offset by persistent earnings downgrades averaging more than 3% per quarter for index EPS.
Mishra said this trend should reverse as GDP growth stabilises and momentum returns, particularly in lagging sectors such as automobiles and financials. This view is supported by bottom-up assessments showing that financials, IT, industrials and energy—nearly two-thirds of index earnings—are based on “reasonable” assumptions.
For the entire interview, watch the accompanying video
