Centre unlikely to shift from capex focus to welfare spending in upcoming budget: Goldman Sachs research

Foreign Brokerage Goldman Sachs sees the Centre in the upcoming first full budget of Modi 3.0 Government “stick” to its earlier announced fiscal deficit target of 5.1 percent of GDP ( or slightly lower) for 2024-25. 

The Union Budget could announce further consolidation in fiscal deficit to level below 4.5 percent for 2025-26, reaffirming commitment to earlier announced fiscal consolidation glide path, according to a new research note that gives a preview of upcoming new budget.

In recent interim budget on February 1, the Centre had pegged the fiscal deficit target for 2024-25 at 5.1 per cent of GDP and 4.5 percent in 2025-26.

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Given that this upcoming budget comes after the below (exit-poll) expectation results of the national elections for the ruling BJP , there is growing expectation among certain investors that this budget will see some relaxation in the fiscal consolidation path and a pivot towards welfare spending from capex.

However Goldman Sachs Research does not agree with this stance of certain investors.

“We push back against both views (relaxation in fiscal consolidation path and pivot towards welfare spending from capex): 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 spill-overs which policymakers may not be willing to give up”, Santanu Sengupta, Chief Economist, Goldman Sachs India said in the research note.

• Also read: Union Budget likely push for manufacturing, consumption, fiscal consolidation

The research note is titled “India’s Fiscal policy: Union Budget Preview: Beyond the numbers”.

Even if Centre were to go in for expenditure allocation towards welfare spending, it may not require a reduction in capex given the higher than expected dividend transfer from the RBI, Sengupta said.

Goldman Sachs Research also sees limited fiscal space for a “stimulus” in FY’24-25.

“In the general government’s budget, interest expense constitutes a large share at 5.4 per cent of GDP and with the primary deficit at 3.5 per cent of GDP in FY24, this leaves the general government with limited fiscal space for stimulus in FY25, in our view”, Sengupta said. 

“In FY25, we expect capex to provide a positive impulse, while welfare spending will likely remain a drag”.

Goldman Sachs Research sees the budget 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). 

• Also read: Budget challenges amidst a robust economy

“We see an emphasis on job creation through labour-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”, Sengupta said.

PUBLIC FINANCE ROADMAP

Goldman Sachs Research note said that 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.