Budget 2022: Neelkanth Mishra On The Government's 100-Metre Sprint To Spend

"I may want to run the 100 metres in under 10 or 12 seconds but I can't make it even in 15." That, in some ways, is what the government is facing as it tries to accelerate spending to boost the economy but finds itself facing questions on execution, according to Neelkanth Mishra, India strategist at Credit Suisse.

"This is the new narrative for the budget—can the budget spend and how much can it spend productively," Mishra said in an interview with BloombergQuint.

For fiscal year 2023, the government budgeted capex of Rs 7.5 lakh crore, a sharp increase over Rs 5.5 lakh crore in the soon-to-conclude financial year. The actual increase in capex during the year may be more modest at closer to 12%, explained Mishra.

As he sees it:

• Of the Rs 2 lakh crore increase in capex, Rs 1 lakh crore is an interest-free loan the government is keeping aside for states. "We don't know where the money is going to be spent. I'm apprehensive that it will be spent."

• Another Rs 20,000 crore within that comes from off-budget spending related to the Prime Minister Awas Yojana. There is also some amount of NHAI spends, which were off-budget and are now on-budget.

• The actual increase is Rs 15,000 crore as part of the Jal Jeevan Mission, an additional Rs 25,000-30,000 crore for the railways, Rs 10,000 crore for roads and Rs 15,000 crore in defence.

"If you add all of that up, you are talking about some Rs 60,000-Rs 65,000 crore increase (in capex)." This is good and it shows excellent intent — specially given that some state elections are coming up but the government is deciding to spend on things which matter in the long run and not necessarily in the short run, said Mishra. "But in terms of aggregate demand boost, I don't think there is that much."

There is also the bigger question of the government's ability to spend.

In the first nine months of FY22, the government had managed to spend 70% of its planned capital expenditure. It hopes to make up the rest in the January-March quarter but there is scepticism on whether it can.

The good thing is that the money has been allocated, said Mishra. So the government wants to spend but departments are struggling. "There is allocation, I'm not convinced that we will be able to spend all of it."

States, too, are struggling to spend.

Conceptually, allocating funds towards state capex is right since a lot of capital expenditure comes via states, said Mishra. "In terms of execution, this doesn't excite me because the states are massively slipping up." Mishra points to the fact that actual budget numbers for states are well below the revised estimates presented. The wide gap suggests a struggle to spend on the ground.

How has the environment changed from one where the government was strapped for funds to one where it is struggling to spend? Two factors have played a role, said Mishra.

First, the tax-to-GDP ratio has gone up. This ratio is likely to be higher than the 10.8-10.9% as per the Budget's revised estimates since the tax projections for the January-March quarter are too conservative, said Mishra.

Second, markets are accepting of a much higher fiscal deficit and the anchor around central fiscal deficit, which used to be 3.5%, is now 6.5%, Mishra said. States, too, are being allowed to run a higher fiscal deficit of up to 4%, with some caveats.

Even after accounting for the increase on account of interest payments, salaries and other items, the government now has large addition space for spending. "There is a 2.5% of GDP extra space left for spending," Mishra said.

The inability to spend is also reflected in the Rs 5.5 lakh crore government cash balance sitting with the Reserve Bank of India. This comes from both the centre and states, which have parked unspent funds in treasury bills.

"At some point, the government along with state governments have to decide enough is enough. We can't spend so much. We are going to now bring down our borrowing targets," said Mishra.

According to Mishra, bond markets, which have seen a sharp rise in yields since the budget announcement, should take note of the fact that tax collections may be higher, spends may be lower. Also, while gross borrowings have risen to nearly Rs 15 lakh crore, household financial savings have also risen.

"But the (bond) market as a whole somehow doesn't seem to be pricing in positive surprises on tax-to-GDP, on government intent versus inability to spend. I mean all of those things are 'water off a rubber ducks back' for the bond market and they are only focusing on a higher borrowing number."

Watch the full conversation below: