India’s Union Budget has delivered continuity rather than surprise, a factor that market participants are increasingly valuing amid global uncertainty. While some analysts were unsettled by the gross borrowing numbers and fiscal deficit trajectory, Neelkanth Mishra, Chief Economist, Axis Bank & Head Of Global Research, Axis Capital believes the broader fiscal framework reflects hard-earned discipline — even as liquidity management remains a key concern for growth and interest rate transmission.

Responding to concerns around the fiscal deficit and borrowing targets, Mishra said the Budget was largely in line with expectations and that this predictability itself is a positive signal for investors.

“So, the budget in many ways was absolutely predictable. There was not much of a surprise and I mean it in a very good way. The government increasing the visibility and reducing policy uncertainty for businesses and investors is a very positive step. The hard miles on fiscal consolidation are behind us,” Mishra said.

He added that with the pace of fiscal consolidation slowing, the economy has room to move closer to its trend growth rate.

“As you know, reduction in fiscal deficit is a drag on growth. So, clearly now with the deficit barely falling, the economy can start getting closer to its trend growth rates. But in order to close the output gap, clearly we are maybe one-and-a-half years behind where we were supposed to be if Covid had not happened,” he said.

However, Mishra flagged that despite strong fiscal discipline, the benefits are not yet translating into lower borrowing costs — largely due to liquidity conditions and government cash management.
“This remarkable fiscal discipline needs to show up in lower bond yields, lower cost of borrowing and unfortunately, as you also mentioned, the borrowing targets and perhaps excessively conservative plan to finance it… See, what has happened over the past two years is that government cash balances have actually shot up,” he explained.He noted that elevated government cash balances are draining liquidity from the banking system.

“What used to be ₹0.5–1 trillion overnight has now risen to maybe ₹3–3.5 trillion, sometimes even ₹4 trillion. And as the government cash balances go up, they actually go out of the deposits, so out of the banking system. This uncertainty itself has pushed up the cost of liquidity,” Mishra said.

He pointed out that banks are facing higher funding costs, which is distorting bond market behavior.

“If the banks today are borrowing 12-month money at 7%, it is not surprising that they are actually selling their holdings of Government of India bonds to generate that liquidity because those are yielding 6.6–6.7. And not surprisingly, the surprise on the gross borrowing target has meant that the yields today are 6.76,” he said.

According to Mishra, the failure of fiscal discipline to translate into lower rates is now a central policy challenge.

“So, despite fiscal discipline which is politically challenging and very hard to do, despite sticking to the debt consolidation path, the transmission to lower rates is not happening and that is the biggest challenge that confronts RBI and the government because unless you do that, how do you close the output gap,” he said.

He stressed the need for more proactive liquidity management and signalling. “Significant injections of liquidity, lot of signalling, the government’s efforts to manage its cash balance more proactively, all of these are important measures to address this challenge,” Mishra added.

On whether India is nearing a fiscal ceiling without large disinvestment proceeds, Mishra said the country has largely returned to pre-Covid fiscal norms — a notable achievement. “Look, the fiscal deficits at the central level are almost back to pre-Covid levels. This is a remarkable achievement,” he said.

He highlighted that the current deficit includes support to states for capital expenditure.

“So, the 4.3% deficit includes about 0.55% of GDP of the interest-free loans to states for capex. So, if you remove that and you compare it to where we were pre-Covid, they are almost there,” he said. Mishra also noted improvements in fiscal transparency.

“Pre-Covid we actually used to have many of these off-balance sheet issues which I think have been now mostly addressed. So, it is a much cleaner number and on an adjusted basis I think is far superior to the fiscal deficits that we used to work with earlier,” he said.

Looking ahead, he said fiscal consolidation has largely done its heavy lifting, allowing policy to increasingly rely on monetary easing.

“The hard miles on fiscal consolidation have been crossed. The fiscal deficit does not need to fall meaningfully from here. But remember that, if your debt to GDP and if the government is reducing crowding out, it enables the private sector to grow faster,” Mishra said. He pointed to narrowing yield differentials between India and the US.

“So, what used to be 8% in India and 2% in the US is now 6.5% in India and 4.25% in the US. And frankly, if the liquidity situation is managed well, my expectation is that we will be closer to 6% in the next 12 months and therefore, the yield gap narrows even further,” he said.

On capital expenditure, Mishra acknowledged steady growth but emphasized that the quality of spending has improved.

“What we are seeing now is capex starting to happen on railways. There was a challenge with the national highways. The strategic plan was a bit of an issue. It looks like we are done with that and now expenditure can start happening. Tendering for national highways can start to pick up,” he said.

He also highlighted a shift away from wasteful spending.

“The expenditure improvement, quality improvement I was talking about, is that if the government spending on the whole is rising at 7% but capex is rising at 11–12%, it shows that the government is refraining from wasteful expenditure and focusing on what it must do instead of using taxpayer money as its own,” Mishra said.