MC Exclusive: Political limits to central government capital spends; capex to grow at nominal GDP growth: Neelkanth Mishra

There's a political limitation on how much the central government can spend.

Neelkanth Mishra, Chief Economist at Axis Bank and an influential voice in the government suggested that government capex will likely see a modest growth in coming years compared to what we have in the post-pandemic period.

He said that the growth in capex will align with nominal GDP growth for two main reasons. Firstly, the government doesn't need to spend more because its primary objective is to make counter-cyclical adjustments in demand. As steady-state demand picks up, evidenced by the real estate cycle, and expansions in steel and power capacity, the government should slow down its spending, as macroeconomic conditions require.

Read: L&T Q1 Results: Net profit jumps 12% to Rs 2,786 crore

Secondly, there's a political limitation on how much the central government can spend. Under the constitution, its control extends only to national highways, railways, airports, and telecom.

Mishra discussed the limitations of infrastructure spending. On roads, there is a cap on expenditure given the current capacity; with 150,000 kilometres of national highways needing repairs every decade, the annual repair rate maxes out at 16,000-18,000 kilometres, making the scope for increasing road repairs limited.

Read more: India losing skilled labor to infrastructure projects in Middle East: L&T CFO

Railway spending is growing, which is promising, but the growth will be gradual, potentially reaching Rs 4.5-5 lakh crore annually in five years. However, this increase won’t be immediate, he added.

In telecom, significant funds have been allocated to BSNL, which is expected to launch its network by Diwali or the end of the year, setting the stage for future 5G investments.

Also read: Direct tax relief for middle class in Budget 2024 is ‘sufficient’: Revenue Secy

For major ports and airports, Mishra said that spending is constrained by the nature of the projects—airports, for instance, involve limited expenditure on runways and buildings.

Mishra also highlighted that the pace of defence projects limits rapid acceleration in government spending. As a result, the industrial and investment cycles are shifting, with the private sector beginning to play a more prominent role.

From a stock market perspective, this will mean moving away from some of those stocks into stocks that are driven more by a surge in private capex.

He suggested that the stellar rally in sectors like defense and railways have stretched valuations. "How much do you want to pay for it? That has to be corrected in railways. I mean, there's a pace at which these companies can grow. Some of these stocks will be trading at 100 times earnings is ridiculous," the market veteran added.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.