As the Union Budget 2025 draws closer, Goldman Sachs posed five questions and gave its expectations around the same, as India goes through a cyclical growth slowdown, driven by fiscal consolidation and slower credit growth. The key questions facing fiscal policymakers in the upcoming Union Budget are likely to be around the speed of fiscal consolidation and the spending priorities of the government, the foreign brokerage said.
"We think elevated public debt-to-GDP is likely to keep the fiscal consolidation path intact, and we expect the government to target fiscal deficit at 4.4–4.6 per cent of GDP in FY26 from 4.9 per cent of GDP in FY25," Goldman Sachs said on Monday.
It believes the Budget 2025 will likely make an overarching statement about long-term economic policy of the government towards 2047 (100 years of Indian independence). It sees continued emphasis on job creation through labor-intensive manufacturing, credit for MSMEs, promoting rural housing programs, and sustained focus on domestic food supply chain and inventory management to control price volatility.
"The Budget is also likely to lay out a roadmap for public debt sustainability, and financing India’s energy security vs. transition needs," it said.
5 top questions Goldman Sachs said the first question in mind is whether the government meet the 4.9 per cent of GDP fiscal deficit target in FY25. It said the receipts upside of 0.2 per cent of GDP and lower-than-budgeted capex will likely enable the government to meet the fiscal deficit target despite lower nominal GDP growth.
"For FY25, we expect a 0.2 per cent of GDP upside in receipts mainly driven by higher income tax collections and non-tax revenues from higher than budgeted dividends from the RBI and state-owned companies, which should offset the shortfall from corporate taxes and excise collections. On the expenditure side, we expect a shortfall of around 0.2 of GDP in capex as indicated by government officials to partially offset the increase in current expenditure partly driven by higher food subsidies," it said.
Putting this together, it expects the government to meet its fiscal deficit target of 4.9 per cent of GDP despite nominal GDP growth projections of 9.7 per cent YoY for FY25.
Over the last 7 years, the government has consistently fallen short budget documents. Goldman Sachs said it would see whether the government has fully utilised the additional expenditure approved through supplementary grants. On average, the government ends up spending 80 per cent of the total budgeted expenditure including additional allocations in a fiscal year
"However, in the post-pandemic period the magnitude of the shortfall has reduced (vs. the pre-pandemic period). Thus, in our view, the government is likely to under utilize the additional expenditure in FY25 as well," it said.
Goldman Sachs said the second question is around the fiscal deficit target for FY26. It thinks the government will try to consolidate the fiscal deficit towards 4.4-4.6 per cent of GDP, with 4.5 per cent of GDP as its base casein FY26.
"The slowdown in real GDP growth in Q2 FY25 (Q3 CY24) was mainly driven by fiscal tightening and macro-prudential tightening by the RBI to curb unsecured lending growth. Fiscal deficit was consistently lower throughout much of 2024, resulting in a drag on growth," it said.
Goldman Sachs wondered why fiscal deficit is so important. It said a reduction of general government fiscal deficit by 1 percentage points to 7 per cent of GDP by FY30 from FY25 with a nominal GDP growth of 11 per cent would eventually reduce the general government debt to below 80 per cent of GDP.
"Thus, to maintain a sustainable and declining (as a % of GDP) debt trajectory over the medium term it is imperative that the union government sticks to its path of fiscal consolidation," it said.
In its fourth question, Goldman Sachs wondered what would be the spending priorities. The foreign brokearge expects capex growth to slow to 13 per cent YoY against FY25 GSe) from over 30 per cent in FY21-24, while there might be a tilt towards welfare expenditure or transfer payments, it said.
It noted that while capex has picked up in the last couple of months, it remains significantly below last year’s level so far in FY25. Going forward, it expects capex to remain at 3.2 per cent of GDP in FY26, implying 13 per cent YoY growth over its FY25 estimates. This is given the fiscal consolidation path of the central government.
"We expect expenditure on rural, welfare, transfer schemes and subsidies to be around their pre-pandemic trends (~3.0% of GDP in FY26). Given the reduced majority of the NDA (National Democratic Alliance) in the 2024 elections, there might be some re-allocation in expenditure towards rural transfers and welfare spending," it said.
Meanwhile, Goldman Sachs wondered whether the RBI be a net buyer in the government bond market in FY26? It said although natural domestic demand for government bonds may remain adequate in FY26, the RBI will have to be a net buyer of government bonds in FY26, to inject rupee liquidity in the banking system and partly offset forex sales related rupee liquidity drain.