Thanks to a higher-than-expected dividend transfer from the RBI, the Central government will likely stick to the announced fiscal deficit target of 5.1% of GDP for FY25 or aim even slightly lower in the Budget later this month, even if it allocates additional funds for welfare spending, Goldman Sachs said on Monday.
The comment is made despite “growing expectation” among some investors that FY25 Budget could see some relaxation in the fiscal consolidation path and a pivot towards welfare spending from capex.
“We push back against both views: there is limited fiscal space in our view to stimulate the economy given high public debt. India’s infrastructure upgrades have created long-term positive growth spillovers which policymakers may not be willing to give up,” Goldman Sachs said.
Even if some extra expenditure is allocated towards welfare spending, it may not require a reduction in capex given the higher-than-expected dividend transfer from the RBI, it said.
The RBI has given an extra dividend of over Rs 1 trillion (0.3% of GDP) in FY25 (for FY24).
The central government’s fiscal impulse breakdown suggests that the very robust capex average growth of around 31% over FY21-24 resulted in a growth boost, while welfare spending has been a net drag since FY22.
“We think this budget will 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),” the investment research firm said.
“We see an emphasis on 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.”
The budget 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 with the role of public finance in balancing India’s energy security vs. transition need.
It said there is likely to be a thrust on some key areas including the rural economy. A thrust on the food supply chain and inventory management domestically to control price volatility is likely to happen through a focus on rural infrastructure for better connectivity, incentivizing domestic food production, cold storage and food processing. Job creation through labour-intensive manufacturing: while integrating in global value chains (possible beneficiary sectors could be textile, footwear, toys etc.), it said. Similarly, support for MSMEs may be given in the form of credit or fiscal incentives. MSMEs in India produce around 30% of output (GVA as of FY22) and employ over 120 million workers.
Skilling will be promoted to bridge the education gap. “We expect workers to be skilled in a short span of time through vocational programs or on-the-job training,” the research report noted. It expects a continued focus on services exports through expanding GCCs, GTCs and GECs.
