Prasad noted that while the government is taking measures to revive consumption—through GST rationalisation, income tax cuts, and earlier policy rate reductions—the impact on the wider economy remains uncertain. The effectiveness of these reforms will depend on whether companies pass on the benefits to consumers to boost affordability and demand or retain them to enhance profitability.
Despite hopes for a revival during the festive season, Prasad cautioned that the broader economy continues to face challenges, including weak sentiment in IT, rising residential prices affecting household investment, and export pressures due to geopolitical tensions.As a result, the quality of earnings growth remains uneven, with a meaningful acceleration in the broader economy unlikely before 2027.
These are edited excerpts of the interview.
Q: Some are making the case that maybe consumption has been in the doldrums, and these GST related reform, simplifications, if it is done in a meaningful way, can turn the tide. Some say it could be a tactical move, while others says it’s durable. Do you believe it is possible and how do you think about it and where will this show up in a big way, if this were to be a meaningful reform?
A: If you look at what the government has been trying to do in the last six, seven months, clearly, the effort seems to be on reviving consumption demand. The government realises that investment demand is being on the weakest side, and starting with the income tax cut, which was announced with the budget, you had an RBI cutting policy rates and now we have a lot of action in the form of GST rate rationalisation. So hopefully all these things result some pick up in consumption demand.
The bottom of the pyramid consumption has been struggling, given income challenges over there. The whole idea is to make things more affordable, and hopefully companies pass on the full benefits of the GST cuts to the consumer, results in prices becoming, or it becoming more affordable and hopefully demand picking up. So that’s what the government is betting on.
The market has a slightly different take on this. The markets which we are assuming that most of the cuts in the in the GST rates, whether it is 28% item moving 20% or a 12% item moving to 5% most of them will be retained by the companies which will result in a big increase in the profitability and profits, which, of course, means that you may not have as much a volume. So, let us see how this exactly plays out. The government intent is very clear, because, the cuts to be passed on and result in high affordability and volume growth market seems to be taking a different view on that.
Q: Do you feel we will at least get into double-digit earnings and maybe better looking toplines by the time we get into full blown festive season?
A: Growth has being sluggish, and that is why the government is trying various things to revive consumption. Do keep in mind that some of the drivers of GDP growth in the last four or five years, which was largely high income household consumption, government spending, and outgoing spending that of real estate, all this looks like they could see some slowdown.
Given the challenges of weakest sentiment in IT sector and and given the fact that residential prices have moved up a lot in the last 18-24 months, I would expect household investment should also slow down. Hope is, we will see some revival consumption, which balances out or slow down investment. Exports is a big challenge given what is happening on the geopolitical front and ongoing tariff issue. With that background, it doesn’t look like you will see a big acceleration in the economy. The hope is somewhere in the festivals season things start picking up.Q: Where are you with respect to full year earnings estimates?
A: We have about 9-9.50% to be precise, but the quality of earnings growth in FY26 is not great. I am talking about Nifty 50 Index, more than 60% of the incremental profits are coming from three sectors and which don’t have much to do with the economy. If you look at about 20% is coming from the metal and mining sector, that is largely on the back of improved profitability for the steel sector or on the back of safeguard duties. Then you have telecom sector including Reliance Industries, which is going to contribute based on the expected increase in tariff somewhere in December-January, time frame. Lastly, you have ONGC also, which is contributing about 20% odd of the incremental profits, that’s more to do with gas price formula. So the nature of the incremental earning growth is not a very good quality, not as if we are seeing some big recovery in economy. Hopefully that will play out in 2027 but that remains to be seen. As of now, the growth trajectory for the broader economy itself is looking a bit challenged, I would say,
Q: You said 9% Nifty earnings growth for FY26? That is your estimate?
A: Yes.
Q: What, according to you, is the message that the government is sending out. In the budget as well, the focus is on putting more money into the hands of taxpayers. Now with the GST cuts as well they are indicating they are focusing more on the consumption story. The capex expenditure, that seems to have been put on the back burner. You have big elections as well coming up. What is your view on this?
A: Government realises that it can do only that much with respect to investment, particularly if you look at the central government, there are three areas where the central government can spend dramatically. One is defence, second is railways and roads. Challenge over there is, if you look at railways in particular, your expenditure used to be about ₹618 billion in FY20. That has already gone up to about ₹2.5-2.6 lakh crore by FY25. A lot of low hanging fruit on the railway capex is already done. What I mean by that is electrification, which used to be some 50% about 10-year plan that has now crossed 90%. We have put in a lot of safety signalling systems and so on and so forth. On the back of that, your average railway freight and passenger rate movement that has gone up. India has already ordered a lot of rolling stock, coaches, etc.
So as you are hitting some sort of a peak to the capacity utilisation of the current railway network, which means you will not probably see a big increase in capex of tailways. If you look at roads, where you are seeing a similar growth of similar – India already has a very decent highway network. Intercity network is quite good, so you will see a natural slowdown over there. The government understand that it can only do that much.
Where India needs to put in more money on the capex side, is the intercity infrastructure combination of, urban housing, mobility and water. Of course, the states are constrained given the fiscal challenges, etc. and institutional capacity is also a bit weak over there. So, I don’t know it looks doubtful that government capex is going accelerate.
Just to give you some data, if you look at public sector plus government spending as a percentage of GDP, that used to about 6.9% of GDP in FY20 that went about 7.9% by the time we reached FY24 which means that it was going much faster than normal GDP growth, but that’s about it. We are flattening out over there, which means the government has to try something new, which is basically the extra focus on consumption for now.
In the meantime, we are still waiting for private capex to pick up. That’s been sluggish. It has been in the range of 11% of GDP for the last several years now, and no signs of acceleration over there. I guess the government is trying whatever it can. It knows that its own spending on capex is going to be limited going forward. Private capex not yet picking up so let’s try whatever we can do on the consumption side.
Q: Why is it that you’re not at all optimistic of any sort of a revival on any element of consumption, whether it is premium, mid, lower end, because of what you started off by saying that companies will probably pocket the benefits of this GST card. Is that why?
A: I’m not saying I’m not positive on consumption. I’m cautious on consumption. The hope is it will recover gradually from where we are, but it’s not going to be a massive recovery. Keep in mind the fact that India is simply not getting enough number of jobs, with most of the incremental workforce ending up in agriculture or in the gig economy, where, of course, income is not going to be very high. So that fundamental structural problems remains. For that, we need private sector investment to really pick up, for jobs to be created on the back of that, incomes to grow and consumption to really take off. We are nowhere near that cycle to start.
