Reflections on Neelkanth Mishra’s Column on the Budget

Most of what you see written about the budget is honestly not worth reading, but there are some folks whose musings ought to be mandatory reading. And if you are going to ask me for my recommendations along these lines, Neelkanth Mishra is certainly among the top three.

What follows is a style of note-taking that I used to post a lot of a couple of years ago or so. I will share those parts of his write-up that I chose to highlight, and also explain why I highlighted them. Here goes:

  1. “As the state’s footprint on the economy has shrunk over the past three decades, the relevance of the annual Union budget for the economy has contracted accordingly.”
    This point is a fairly obvious ones to professional economists, but it bears repetition. Especially because this day is treated with such importance by the media. Panel discussions, full page articles, Twitter-aflutter – although that last one doesn’t take much, so I suppose a budget day might actually be understandable! But we’re talking about roughly a tenth or so of India’s GDP where the budget is concerned, and if you take into account the fact that GST is now a reality, the centrality of the budget is reduced even further.
    Don’t misunderstand me – it is an important event, it’s not as big a deal as it once used to be.

  2. With reference to the government’s fiscal conservatism: “This seems prudent, given the limited tolerance of financial markets globally to policy errors, and the economic damage market turbulence can cause.”
    Remember Liz Truss? Things could have been far worse, and they aren’t, and that’s worth remembering.

  3. “The Union government’s commitment to the medium-term fiscal consolidation path was reiterated: A fiscal deficit of less than 4.5 per cent of GDP in fiscal year 2026.”
    I’m not sure if I should be doing a Straussian reading here in terms of what has been left unsaid, but I’m tempted to disagree with what has been written. I’m done reading about glide paths and medium term projections of the fiscal deficit. It is enough to get a sense of where it will be next year, and the data over the last twenty years or so shows us that planning for beyond that horizon is a pointless exercise. Plus, the uncertainty in the global economy is such that any number for the year 2026 is a guess. Nothing more.

  4. “Given the strong tax buoyancy this year, the government could have taken a slightly lower tax-to-GDP ratio next year than the unchanged number it has assumed, but the benefits of greater digitisation and formalisation may continue, and lower tax rates often help tax compliance.”
    I agree with the first half of the sentence, and I hope the second half turns out to be true, but I’ll want to bet against it. I would be very glad to be wrong.

  5. “Perhaps more importantly, the government chose to redeploy its savings from the fiscal support it had to provide during Covid and then in the aftermath of the Russia-Ukraine conflict to capital expenditure”
    We need to do more of capital expenditure, there is no getting around this point. Therefore agreed.

  6. “The general government debt to GDP ratio (which includes central and state debt) has fallen from 90 per cent in FY2021 to 83 per cent now, as nominal GDP growth has picked up, but it is still well above the 73 per cent seen pre-Covid, and the 60 per cent recommended by the FRBM Review Committee. For it to fall back to those levels, the primary deficit (fiscal deficit minus the interest payments) needs to fall to nearly zero. However, it is still near 3 per cent of GDP, and even at 4.5 per cent fiscal deficit in FY2026, the primary deficit would still be nearly 1 per cent of GDP.”
    See this for a relatively simple explainer of not just the theory around deficits, but also said theory’s evolution over time. Be source agnostic – by which I mean don’t depend on any one resource in particular. But this is something you should be very familiar with if you are a student of macro.

  7. “Economies like India need to grow out of their fiscal problems and cannot shrink into them.”
    I hope you don’t understand this sentence, and I hope you think about it, and then read the next sentence from the write-up.

  8. “This is where the nature of government expenditure makes a difference. Allocations to railways and roads, as well as to schemes like Pradhan Mantri Awas Yojana and for energy transition should support growth both over the near term (via expenditure) as well as the medium-term (through cheaper logistics and greater energy self-sufficiency).”
    Yup, but always beware the limitations of state capacity.

  9. “In this regard, the demand to switch back to the old pension scheme for government employees, where taxpayer funds are used to guarantee benefits to a select group, is a risky one.”
    An understatement if ever there was one.

  10. “That state governments this year may end up with an aggregate fiscal deficit of just 2.4 per cent of GDP versus the 3.4 per cent budgeted, given the surge in tax inflows and an inability to quickly ramp up spending, is also helping. The decline in bond yields on budget day is a sign, in our view.”
    In my experience, bond market dynamics remain poorly understood among both undergrad and post-grad students of economics. That’s a broad characterization, and as with all such broad characterizations, there are significant exceptions. But I still maintain that the bond markets don’t get enough importance in the teaching of macro at an introductory level.

  11. “In turbulent times like these, a good budget is just a starting point. The turmoil in the global economy is likely to continue, as the impact of higher interest rates shows up in weaker demand for consumption and investment, and geopolitical tensions continue to disrupt energy supplies and trade. As the resilience of the domestic economy gets tested by global headwinds, deft fiscal manoeuvres may be necessary, like they were this year.”
    With this budget, we’ve left ourselves some wriggle room if things go south really badly really quickly this year – and they well might do so.

Your mileage may vary, but the meta-point of this post (and all such posts by me) is not just to show you which parts of an article I found worth highlighting. It is also to tell you that note-taking is an underrated activity. Get into the habit of taking notes for the good stuff that you read. You don’t need to make your notes public like I just did (although skin in the game remains an underrated concept). But the more you take notes, the more you’ll begin to connect the dots across different stuff you’ve read, and then you’re off to the races.

Build the habit of taking notes and trust me, it is very much a superpower.