For years, low inflation, falling deficits and strong tax collections were unambiguously good news for India’s economy and markets. As Budget 2026 approaches, that narrative is quietly turning on its head.

Top economists now warn that too little inflation and sluggish nominal GDP growth have become a problem—hurting government revenues, corporate earnings and even debt consolidation plans. The focus is shifting decisively from real GDP to nominal GDP, a transition that could define both the Union Budget and market outcomes in FY27.

Speaking at CNBC-TV18 Markets Forum event, Neelkanth Mishra of Axis Bank, JP Morgan’s Sajjid Chinoy and UBS’s Gautam Chhaochharia outlined why the macro playbook that worked post-Covid may no longer suffice.
From celebrating disinflation to fearing it

India’s recent growth years were marked by unusual comfort on the fiscal front. Despite deficits of 10%, 6% and then 4.4%, markets remained relaxed as tax collections repeatedly surprised on the upside. Inflation stayed low, purchasing power improved and earnings momentum was assumed to follow.

That assumption has broken down

With CPI near 2% and WPI flirting with zero, the GDP deflator has fallen to about 0.5%—the lowest in nearly five decades. The result: strong real GDP growth has failed to translate into revenue growth or corporate earnings. Six consecutive quarters of single-digit Nifty earnings growth despite 8% GDP expansion have exposed the weakness of a low-nominal-growth environment.

Nominal GDP moves to centre stage

JP Morgan’s Sajjid Chinoy expects real GDP growth to moderate from around 7.5% this year to a more conservative 6.5% as several cyclical tailwinds fade—tax cuts, easing regulations, a strong monsoon, falling oil prices and unusually low inflation.

On nominal GDP, Chinoy argues this year may have been an overshoot driven by exceptionally weak inflation. Some mean reversion is likely, but not a return to the old high-inflation world.

“We are in a new regime where inflation will remain structurally lower,” Chinoy said, pointing to persistent global disinflation forces. His conservative framework assumes a 2–3% GDP deflator and nominal GDP growth closer to 9%, though he expects the government to budget for around 10%, as it did last year.

The stakes are high. Nominal GDP does not just determine tax buoyancy—it directly impacts debt dynamics. With the government committed to reducing debt-to-GDP to 50%, even a one-percentage-point shortfall in nominal growth would require sharper fiscal consolidation.

China’s excess capacity: the hidden constraint

A key reason inflation may remain subdued is China.

Chinoy flagged China’s massive excess manufacturing capacity as the “elephant in the room”. With domestic demand weak and a 5% growth target to meet, China continues to export deflation to the rest of the world, particularly Asia. That pressure, he said, is unlikely to fade anytime soon.

Even geopolitical risks have failed to lift inflation meaningfully. Despite tensions in West Asia, oil markets remain well supplied, with underlying pressures pointing towards lower, not higher, prices.

For India, this means WPI could stay depressed, limiting pricing power for companies and capping nominal GDP growth.

Mishra’s optimism: credit cycle turns virtuous

Neelkanth Mishra is more optimistic on the growth outlook. While agreeing that nominal GDP is now critical for policymakers, he believes real growth in FY27 could exceed the widely expected 6.5%.

His argument rests on the credit cycle.

Monetary easing, Mishra said, works in stages. While rate cuts and liquidity injections came earlier, the real impact is visible only when credit growth accelerates. Recent data show a sharp pickup in loan disbursements, suggesting borrowing and spending are beginning to rise.

“What was a vicious cycle is now starting to become a virtuous cycle,” Mishra said, adding that rising credit demand could lift both real growth and earnings momentum.

On nominal GDP, Mishra sees a credible path to double digits—around 10.5%—with real growth of 7.5% and a deflator closer to 3.5%.

Metals, WPI and the inflation puzzle

China’s influence is also visible in commodities. Mishra expects ferrous metals and iron ore prices to soften as supply comes on stream and restocking fades, while aluminium looks expensive given falling energy costs.

Low food and vegetable prices, meanwhile, have dragged WPI lower, reinforcing disinflationary pressures even as demand improves.

The implication: inflation may remain structurally low even in a recovery, complicating both fiscal planning and earnings expectations.

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Earnings revival: 10% or 15%?

For markets, the key question is whether earnings growth merely normalises or meaningfully accelerates.

UBS’s Gautam Chhaochharia says an earnings pickup is “almost a given” as nominal GDP improves. The debate is whether growth settles at 10–12% or pushes into the mid-teens.

Markets appear to be pricing in closer to 15%, assuming a sustained credit upswing. Chhaochharia says that assumption hinges on one variable above all others: bank’s risk appetite.

India’s banking system is among the best capitalised in years, and early signs suggest lenders—including large private banks—are beginning to loosen credit standards after a prolonged period of caution.

If that trend holds, it could unlock stronger investment, faster earnings growth and justify market optimism. If it falters, valuations may look stretched.

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Budget 2026: a tougher macro balancing act

For the government, Budget 2026 will play out against a far more complex backdrop than recent years. Fiscal comfort is giving way to revenue anxiety, and the margin for error is shrinking.

The challenge will be to balance fiscal consolidation with policies that revive nominal growth—without relying on the high inflation of the past.

As the economists warn, India’s next growth phase may depend less on celebrating low inflation and more on learning how to live—and grow—with it.

Watch accompanying video for entire discussion.