Goldman Sachs: India’s macro stability intact despite Modi’s reduced majority

Foreign brokerage Goldman Sachs expects India’s macro stability to continue and not get compromised even with a reduced majority for the Modi-led National Democratic Alliance (NDA) regime.

Despite PM Modi’s narrower 2024 victory, the government is expected to maintain a 5.1 per cent fiscal consolidation path with possible spending reallocation to welfare schemes and subsidies. 

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This may not require a reduction in capex budgets given the higher-than-expected RBI dividend transfer (₹2.1 lakh crore) last month, Santanu Sengupta, Chief Economist, Goldman Sachs India, said in a note post the election result announcement.

“Even with a smaller majority, we think India’s macro stability is likely to continue”, Sengupta said. 

In 2023-24, the Centre’s consolidated fiscal deficit was 5.6 per cent of GDP, lower than the revised estimate of 5.8 percent, mainly due to expenditure cuts in March 2024. This is even as receipts came in higher than the revised estimate.

Overall expenditure was lower by ₹50,000 crore compared to RE, as the government reduced subsidy payouts by ₹ 30,000 crore , while receipts were higher than the Revised Estimate by ₹20,000 crore on the back of high non-tax revenues (dividend from the RBI and public sector undertakings).

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The recent interim budget had pegged the Centre’s capex outlay for current fiscal at ₹ 11.11 lakh crore, substantially higher than ₹ 9.5 lakh crore in the revised estimate for 2023-24. 

In recent years the Centre has focused on a capex-led growth strategy, raising the annual spend on this country from about ₹2.5 lakh crore to about ₹9.5 lakh crore in 2023-24.

Goldman Sachs Research noted that this is the first time in the last ten years, that the BJP will be running a government without a majority of its own in the Lok Sabha. According to Sengupta, the main challenge for them is going to be managing the coalition partners, who are likely to negotiate for Members of Parliament from their parties to be nominated as ministers in some key ministries.

“We think a reduced political mandate will make it difficult for passing structural reforms like land reforms to aid manufacturing growth and farm sector reforms to enhance productivity growth,” he said.