Goldman Sachs on 8 July said the general government is likely to stick to the announced fiscal deficit target of 5.1% of GDP for FY25 (or even slightly lower) and announce further consolidation to a deficit of below 4.5% of GDP by FY26.
“Even if we see some expenditure allocation towards welfare spending, it may not require a reduction in capex given the higher than expected dividend transfer from the RBI,” a press release said.
Following is the highlights of the report:
There is a growing expectation among some investors that India's final union budget for FY25 will see some relaxation in the fiscal consolidation path and a pivot towards welfare spending from capex. We push back against both views: a) there is limited fiscal space in our view to stimulate the economy given high public debt, b) India's infrastructure upgrades have created long-term positive growth spillovers which policymakers may not be willing to give up.
* We expect the general government to stick to the announced fiscal deficit target of 5.1% of GDP for FY25 (or even slightly lower) and announce further consolidation to a deficit of below 4.5% of GDP by FY26. Even if we see some expenditure allocation towards welfare spending, it may not require a reduction in capex given the higher than expected dividend transfer from the RBI.
*In the general government's budget, interest expense constitutes a large share at 5.4% of GDP and with the primary deficit at 3.5% of GDP in FY24, this leaves the general government with limited fiscal space for stimulus in FY25, in our view. Our fiscal impulse calculations also show that general government fiscal policy has been a drag on growth since FY22 and will remain so in FY25 and FY26 given the fiscal consolidation target of the central government.
*The central government's fiscal impulse breakdown suggests that the very robust capex CAGR of ~31% over FY21-24 resulted in a growth boost, while welfare spending has been a net drag since FY22. In FY25, we expect capex to provide a positive impulse, while welfare spending will likely remain a drag.
*We think this budget will go beyond just fiscal numbers, and likely make an overarching statement about long-term economic policy of the government towards 2047 (100 years of Indian independence). We see an emphasis on job creation through labor-intensive manufacturing, credit for MSMEs, continued focus on services exports by expanding GCCs, and a thrust on domestic food supply chain and inventory management to control price volatility. The budget is also likely to lay out a path for the future of public finance in India, entailing: a) a roadmap for public debt sustainability, and b) green finance: the role of public finance in balancing India's energy security vs. transition needs.