Here’s a bold statement: India’s economic narrative is flipping on its head, and it’s not just about growth anymore—it’s about inflation, or rather, the lack of it. But here’s where it gets controversial: After years of celebrating low inflation as a win, economists now argue that India needs it back, and this shift could redefine the country’s economic trajectory. As Budget 2026 looms, the focus is no longer on real GDP growth but on nominal GDP, a metric that’s quietly become the real game-changer for government revenues, corporate earnings, and debt management.
For years, India reveled in low inflation, shrinking deficits, and robust tax collections—all hallmarks of a stable economy. Yet, as top economists like Neelkanth Mishra of Axis Bank, JP Morgan’s Sajjid Chinoy, and UBS’s Gautam Chhaochharia recently pointed out, this narrative is unraveling. Speaking at the CNBC-TV18 Markets Forum, they highlighted how the post-Covid playbook may no longer hold. The problem? Nominal GDP growth has stalled, and inflation is too low, creating a ripple effect that’s stifling revenue growth and corporate profits.
And this is the part most people miss: India’s recent fiscal comfort was built on an unusual foundation. Despite deficits hovering around 10%, 6%, and 4.4%, markets remained unfazed as tax collections consistently exceeded expectations. Low inflation boosted purchasing power, and earnings growth seemed assured. But that assumption has crumbled. With the Consumer Price Index (CPI) near 2% and the Wholesale Price Index (WPI) hovering around zero, the GDP deflator has plummeted to 0.5%—its lowest in nearly five decades. The result? Strong real GDP growth hasn’t translated into revenue or earnings growth. Six straight quarters of single-digit Nifty earnings growth, despite an 8% GDP expansion, expose the fragility of a low-nominal-growth environment.
Nominal GDP has taken center stage, and for good reason. It’s not just about tax buoyancy; it directly influences debt dynamics. The government’s goal to reduce the debt-to-GDP ratio to 50% hinges on nominal growth. Even a slight shortfall could force sharper fiscal tightening.
Here’s the controversial bit: China’s excess manufacturing capacity is the elephant in the room. With weak domestic demand and a 5% growth target, China continues to export deflation globally, particularly to Asia. This pressure isn’t going away anytime soon, keeping inflation subdued. Even geopolitical tensions in West Asia haven’t significantly lifted oil prices, which remain well-supplied. For India, this means WPI could stay low, limiting companies’ pricing power and capping nominal GDP growth.
Neelkanth Mishra offers a glimmer of hope, arguing that the credit cycle is turning virtuous. Monetary easing, he says, works in stages, and recent data shows a sharp rise in loan disbursements, signaling increased borrowing and spending. If this trend holds, it could boost both real growth and earnings momentum. Mishra predicts nominal GDP could hit double digits, around 10.5%, with real growth at 7.5% and a deflator near 3.5%.
But China’s shadow looms large, even in commodities. Mishra expects ferrous metals and iron ore prices to soften as supply increases, while aluminium looks overpriced given falling energy costs. Low food and vegetable prices have further dragged down WPI, reinforcing disinflationary pressures. This implies that inflation may remain structurally low, even in a recovery, complicating fiscal planning and earnings expectations.
For markets, the question is whether earnings growth will normalize or accelerate. UBS’s Gautam Chhaochharia believes an earnings pickup is almost certain as nominal GDP improves, but the debate is whether growth will settle at 10–12% or push into the mid-teens. Markets are betting on closer to 15%, assuming a sustained credit upswing. However, this hinges on banks’ risk appetite. India’s banking system is well-capitalized, and early signs suggest lenders are loosening credit standards after years of caution. If this trend continues, it could unlock stronger investment and faster earnings growth. But if it falters, valuations may look stretched.
Budget 2026 will be a high-wire act for the government. Fiscal comfort is giving way to revenue anxiety, and the margin for error is shrinking. The challenge? Balancing fiscal consolidation with policies that revive nominal growth—without resorting to the high inflation of the past. As economists warn, India’s next growth phase may depend less on celebrating low inflation and more on learning to thrive with it.
Thought-provoking question for you: Is India’s economic future better served by embracing moderate inflation, or should it double down on the low-inflation model? Share your thoughts in the comments—let’s spark a debate!
