Goldman Sachs Flags Fiscal Consolidation, Spending Priorities in India's FY26 Budget

As India prepares to unveil its Union Budget for FY26, Goldman Sachs emphasizes key concerns for policymakers: fiscal consolidation amidst elevated public debt and strategic government spending. With a targeted fiscal deficit decrease and balancing act on growth, the budget is pivotal for India's economic stability.

As the Union Budget for FY26 approaches, scheduled for a February 1, 2025 presentation, Goldman Sachs has surfaced two pivotal concerns for Indian policymakers: the trajectory of fiscal consolidation and government spending priorities. The report underscores the upcoming budget's critical role in balancing economic growth with fiscal discipline as India grapples with high public debt and deficit levels, standing out among emerging markets.

Goldman Sachs suggests that the government will likely maintain its current path of fiscal consolidation, motivated by the necessity to manage high public debt-to-GDP ratios. However, the report warns of potential economic growth impediments due to fiscal tightening in the upcoming fiscal year.

A notable slowdown in public capital expenditure (capex) growth was observed. The report indicates that the peak growth phase in public capex is past, with future expansion expected to match or lag behind nominal GDP growth rates. Welfare spending is also projected to remain modest, continuing pre-pandemic trends. India's current cyclical growth slowdown is attributed to fiscal tightening and reduced credit growth, influenced by the Reserve Bank of India's macro-prudential measures to control consumer loans.

The central government is anticipated to target a fiscal deficit between 4.4-4.6% of GDP for FY26, down from a 4.9% target in FY25, reflecting the continued focus on fiscal consolidation amid high public debt levels.

Goldman Sachs posits, "We think elevated public debt-to-GDP is likely to keep the fiscal consolidation path intact," forecasting a 4.4-4.6% GDP target for FY26. Despite robust tax collections in FY25, capital expenditure has remained restrained. The budget is expected to make a significant statement on long-term economic policies towards 2047, emphasizing job creation, credit for MSMEs, and rural housing initiatives.

In addition, the budget aims to chart a path for public debt sustainability and prioritize energy security versus transition needs. Proposed expenditure on rural, welfare, transfer schemes, and subsidies may revert to pre-pandemic levels (3% of GDP for FY26) amidst potential reallocations due to the Central government's reduced majority. (ANI)

(With inputs from agencies.)