Budget FY26: Goldman Sachs highlights focus on fiscal deficit, growth

As India gears up for the Union Budget for the financial year 2025-2026 (FY26) on February 1, a report by Goldman Sachs highlighted two critical challenges- managing fiscal consolidation and prioritising government spending- that could play a crucial role in shaping India's economic trajectory amid high public debt levels and fiscal deficit compared to other emerging markets, the foreign broker said.

 

Balancing fiscal consolidation and growth

 

For several years, India has been facing the challenge of reducing its fiscal deficit while sustaining economic growth. The fiscal deficit target for FY26 is expected to be set at 4.4-4.6 per cent of GDP, a reduction from 4.9 per cent in FY25. However, according to the report, this tightening could slow economic growth, which is already experiencing a cyclical downturn due to reduced public spending and tighter credit policies.

 

Public spending: Capex and welfare trends

 

The report highlights a slowdown in public capital expenditure (capex). After a phase of rapid growth, capex is now expected to grow in line with or below the rate of nominal (Gross Domestic Production) GDP growth. Welfare spending will likely revert to pre-pandemic trends, with allocations expected to be around 3 per cent of GDP in FY26. However, rural and welfare programmes may see some adjustments, reflecting the government’s response to political dynamics post-2024 elections.

 

Goldman Sachs expects the Union Budget 2025 is essential to provide a roadmap for India's long-term economic strategy towards 2047, marking 100 years of independence. Some of the likely focus areas include:

 

·  Job creation: Promoting labour-intensive manufacturing sectors.

 

·  MSME credit: Enhancing support for small and medium enterprises.

 

·  Rural development: Expanding housing programmes in rural areas.

 

·  Food supply chain: Strengthening infrastructure to control price volatility.

 

·  Energy transition: Balancing energy security with sustainable development goals.

 

Role of tax collections in budget planning

According to the report, robust tax collections in FY25, particularly from direct taxes, have given the government some flexibility in increasing current expenditures. However, capex spending has remained lower than budgeted, providing additional room to meet fiscal deficit targets.

 

Debt and deficit: Why they matter

 

India's elevated public debt-to-GDP ratio remains a concern. A reduction in the general fiscal deficit from 8 per cent in FY25 to 7 per cent by FY30 is critical to keeping public debt sustainable, the report said. Fiscal consolidation will help reduce this ratio over time, creating more room for economic growth and financial stability.

 

Major questions ahead of Budget 2025

 

Goldman Sachs posed five key questions for policymakers:

 

1.       The government is likely to meet its 4.9 per cent target due to higher income tax collections and reduced capex spending.

 

2.      Fiscal deficit is expected to consolidate further to 4.4-4.6 per cent of GDP.

 

3.      Lower deficits ensure sustainable public debt levels, maintaining fiscal stability.

 

4.      Capex growth is expected to slow, with a potential shift towards welfare spending.

 

5.       The RBI may need to buy government bonds to maintain liquidity in the financial system.