Economic vision and not stimulus in Modi 3.0 Budget: Goldman Sachs

The upcoming budget on July 23 is likely to stick to the path of fiscal consolidation, said analysts at Goldman Sachs in a recent note, who expect finance minister Nirmala Sitharaman’s Modi 3.0 budget to focus on the broad economic agenda rather than doling out minor stimulus measures.

There is limited fiscal space, Goldman Sachs said, to stimulate the economy given high public debt. That apart, India’s infrastructure upgrades have created long-term positive growth spillovers, which they believe policymakers may not be willing to give up.

“The government will use the budget as an opportunity to make a big picture statement about the long-term economic policy vision over the next several years, rather than minor stimulus announcements. These are likely going to align with the government’s development agenda for 2047 (coinciding with centennial of Indian independence),” wrote Andrew Tilton, chief Asia-Pacific economist and head of EM economic research at Goldman Sachs in a note co-authored with Santanu Sengupta and Arjun Varma.

The government, Goldman Sachs believes, is likely to stick to the announced fiscal deficit target of 5.1 per cent of gross domestic product (GDP) for FY25 (or even slightly lower) and announce further consolidation to a deficit of below 4.5 per cent of GDP by FY26.

Focus areas

"Even if we see some expenditure allocation towards welfare spending, it may not require a reduction in capex given the higher than expected dividend transfer from the Reserve Bank of India (RBI). If the government chooses to change income tax policy, based on our assessment of hypothetical scenarios, the revenue loss of the government is likely to be around 5-15bp of GDP with the fiscal impulse being meager around 2-7bp in FY25," they said.

Job creation through labor-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 are some of the areas, the research and broking house said, that Nirmala Sitharaman's Modi 3.0 budget is likely to focus on. 

Coalition demands

The budget, Goldman Sachs said, is also likely to lay out a path for the future of public finance in India, entailing a roadmap for public debt sustainability, and green finance.

This is the first time in the last ten years that the Bharatiya Janata Party (BJP) will be running a government without a majority on its own in the Lok Sabha. A reduced political mandate, analysts at Goldman Sachs said, will require more political capital to be spent behind passing structural reforms like land reform and farm sector reforms.

The coalition partners, Andhra Pradesh and Bihar, might also aim to reduce their debt burden should they receive any assistance from the center in the upcoming budget, Goldman Sachs said, which is at 33 per cent/36 per cent of state GDP (as per FY24 BE), respectively. 

“In our view, the allocation from the center might not be large as a hypothetical transfer of 0.1 per cent of national GDP to the states would in itself imply a 3 per cent / 2 per cent of state GDP boost to Bihar / Andhra Pradesh,” the note said.