Budget 2024: Expect long-term economic vision and focus on job creation, not populism: Goldman Sachs

Finance Minister Nirmala Sitharaman is set to present the Union Budget for Financial Year 2024-2025 on July 23. This will be the first full budget of the newly formed Modi 3.0 government. On February 1, the government had announced the Interim Budget for FY24 ahead of the Lok Sabha elections.

This upcoming union budget is expected to go beyond just fiscal numbers, and likely make an overarching statement about long-term economic policy of the government towards 2047, according to Goldman Sachs.

While there is a general expectation among some investors that the budget will see some relaxation in the fiscal consolidation path and a pivot towards welfare spending from capex, analysts at Goldman Sachs pushed back against both views.

Goldman Sachs believes there is limited fiscal space to stimulate the economy given high public debt and India’s infrastructure upgrades have created long-term positive growth spillovers which policymakers may not be willing to give up.

It expects the central government to stick to the announced fiscal deficit target of 5.1% of GDP for FY25 (or even slightly lower) and announce further consolidation to a deficit of below 4.5% of GDP by FY26.

Moreover, any likely expenditure allocation towards welfare spending may not require a reduction in capex given the higher than expected dividend transfer from the Reserve Bank of India (RBI).

“In the general government’s budget, interest expense constitutes a large share at 5.4% of GDP and with the primary deficit at 3.5% of GDP in FY24, this leaves the general government with limited fiscal space for stimulus in FY25, in our view. Our fiscal impulse calculations also show that general government fiscal policy has been a drag on growth since FY22 and will remain so in FY25 and FY26 given the fiscal consolidation target of the central government,” Goldman Sachs said in a note.

Additionally, it expects capex to provide a positive impulse in FY25, while welfare spending will likely remain a drag.

“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). 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,” Goldman Sachs said.

It is also expected that the budget will likely lay out a path for the future of public finance in India, entailing a roadmap for public debt sustainability, and green finance.

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