Neelkanth Mishra (Centre), who serves as a Part-Time Member of the PM’s Economic Advisory Council, decoded the challenges before the Indian economy. The session was moderated by Executive Editor P Vaidyanathan Iyer (Right).
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Neelkanth Mishra, Co-head of Asia Pacific Strategy, India Equity Strategist for Credit Suisse and Part-Time Member of the PM’s Economic Advisory Council, decoded the challenges before our economy. The session was moderated by Executive Editor P Vaidyanathan Iyer.
On major concerns for the Indian economy
I think the government’s role in the economy increased substantially during the Covid pandemic and it is very important to calibrate the withdrawal. So, when a government’s fiscal deficit goes up, it means that the government is borrowing from the future and spending now. The second big variable is the amount you borrow from the market. Before Covid, the government’s borrowing was Rs 4-5 lakh crore which has now jumped to almost Rs 12 lakh crore. Then there was a shortfall in tax receipts. So, this suddenly creates pressure in the market. The third concern is that your numbers need to be very credible. This is an extraordinarily volatile global economy. In fact, while the Indian private sector and consumption are beginning to recover, there are still questions.
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This brings us to the fourth factor, that of financial stability. We may think fundamentals of the economy drive financial markets but very often financial markets can also affect the economy. Suppose there is some disbelief in fiscal numbers and bond deals spike by 50 basis points. Then suddenly, the cost of borrowing for the overall health of the economy shoots up and creates downward spirals. If the economy slows down, then the government’s tax revenue starts to slow down and a lot of damage can happen as we saw in the UK.
On rating the Budget
The numbers are quite credible, I don’t think anyone has a problem with a 10.5 per cent nominal GDP growth. The apprehension that many had was with regard to the quality of expenditure, whether the government would give handouts or spend on longer-term growth multipliers.
The fact that the government continues to focus on capital expenditure is very important because the size of the fiscal deficit and government expenditure are what drive near-term or medium-term growth. If you raise the allocation for schemes like PM KISAN, raise the base rate of wages or announce a cash transfer scheme so that an extra Rs 100 go to someone’s pocket, people start spending. This creates aggregate demand. It could also create higher inflation if you choose to spend that Rs 100 on building a road. It creates demand for steel, jobs and over a period of time, brings down logistics costs, making India more competitive, and therefore, supporting medium-term growth. Now whether the government is able to meet these capital expenditure targets, whether the Rs 1.3 lakh crore have been handed over to states for doing capex or whether the states are able to ramp up or not, time will tell.
On increasing capex
While subsidy allocations have come down, fertiliser subsidies are about filling the gap between market and government fixed prices. As market prices come down, the fertiliser subsidies will come down too. The government’s intent is not to reduce the allocation, it is just that it is less necessary. Similarly, NREGA is a demand-driven scheme. If more people demand it, the Rs 60,000 crore allocation will become Rs 80,000 crore again. If there is more demand, there will be supplementary grants mid-year.
Private sector capex has been doing well. Industrial goods suppliers, like capital equipment suppliers, are consistently showing significant improvement in their order books. Very few of those are government projects. If you see the reduction in India’s capital expenditure ratio, what in economic parlance is Gross Fixed Capital Formation (GFCF) to GDP, which is the total investment happening in the economy as a percentage of GDP, that was primarily because of real estate. These investments from 2012 to 2020 – and very likely to 2022 – had actually been stagnant and had declined as a percentage of GDP. When those numbers come back, you will see that GFCF ratios start going up. Private corporate capex has been quite steady even during this period. Some of the credit improvement that you’ve seen from the banks on new investment announcements have come through.
The Central government’s mandate does not go beyond highways and railways. I’m glad airports are expanding but an airport is just a runway with a building and it’s not very capital-intensive. From a Rs 2 lakh crore railway capex, we need to spend Rs 8 to 10 lakh crore over a period of time. The problem has been absorptive capacity, in the sense that the railways have struggled to spend the money given to them. It’s the same with national highways too. We still need significant investments in roads and railways to facilitate lower logistics costs and, therefore, support private sector capex from a global competitiveness perspective over the next 10 years.
On efficacy of Production-Linked Incentive (PLI) schemes
The PLI scheme is a very creative way to align the interests of the government and the private sector. More importantly, supply chain shifts are starting to happen. Some of them are policy-driven but quite a few suppliers are coming through. In 2018, only five units from India were among Apple’s top 200 suppliers, there were 13 in 2021 but I wouldn’t be surprised if they are substantially more when the 2022 list comes out. Then solar panels manufacturing has potential. When you think about all the capex in PLI schemes over four to five years, it would be only about $21 billion. In an economy where the total aggregate investment is close to a trillion dollars, $ 20-25 billion over five years is not that substantial. But it is a very important signalling mechanism that India wants manufacturing. We need to get the apparel sector right because it’s very significant in terms of job creation and is being seeded by China.
Revision of slabs costs the government about Rs 35,000 crore, a very small percentage of aggregate consumption. So, I would not look at it as a consumption stimulus. Some of these schemes are seen as giving relief to the taxpayer, creating more incentives to get more people into the tax base and simplifying the process of tax filing.
What is most important is the slowdown of exports and I’m apprehensive that if Indian demand remains resilient, global manufacturers could start pushing their products into India. There is a lot of goods deflation happening right now, so we should be careful about dumping.
Financial savings percentages at a gross level are not as bad as they are at a net level. Household borrowing has gone up and while that is criticised as a debt-driven culture, these small ticket loans are very small in my view.
One of the reasons that household debt has actually gone up is because the informal sector, which was earlier shut out of the formal borrowing system, is getting credit now. I think a debt-to-GDP ratio of above 80 is very dangerous. The best way to shrink the debt-to-GDP ratio is to grow the denominator, the nominal GDP.
On gender budgeting in India
The female labour force participation rate in India is very low. Instead of just looking at specific gender allocations, think about ways to get women back to work, like helping them save time walking five kilometres to fetch water. Give them piped water. Ever since LPG cylinders have reached women, the enrolment of girls, who would be deployed for chores and collecting cow dung, up to class VI has improved dramatically.
P. Vaidyanathan Iyer is The Indian Express’s Managing Editor, and leads the newspaper’s reporting across the country. He writes on India’s political economy, and works closely with reporters exploring investigation in subjects where business and politics intersect.
He was earlier the Resident Editor in Mumbai driving Maharashtra’s political and government coverage. He joined the newspaper in April 2008 as its National Business Editor in Delhi, reporting and leading the economy and policy coverage.
He has won several accolades including the Ramnath Goenka Excellence in Journalism Award twice, the KC Kulish Award of Merit, and the Prem Bhatia Award for Political Reporting and Analysis. A member of the Pulitzer-winning International Consortium of Investigative Journalists (ICIJ), Vaidyanathan worked on several projects investigating offshore tax havens.
He co-authored Panama Papers: The Untold India Story of the Trailblazing Offshore Investigation, published by Penguin.
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