Budget 2025 – The Government will meet its fiscal deficit goal of 4,9% GDP by FY25. Receipts exceeding 0.2% GDP are expected, as well as lower capex than planned, in spite of lower nominal GDP growth.
Budget 2025 – Finance Minister Nirmala Sitharaman will present the Union Budget of FY26 to be presented on 1 February 2025.
The Union Budget 2025 has been presented at a crucial time. Global economies are increasingly shifting from globalization towards protectionism, and tariffs are becoming a key component of policies.
India currently experiences a cycle of slowing economic growth. The reason for this is fiscal consolidation measures, and also a decrease in credit growth as a result of Reserve Bank of India’s macroprudential tightening of lending to consumers.
The government has been able to spend more on current expenses in the fiscal year currently underway, thanks to the strong tax collections, which are largely driven by direct taxes. Capital expenditures have, however, remained relatively muted.
Goldman Sachs estimates that capex likely reached its peak at 3,2% GDP in FY24, and could fall further in future years due to the fiscal consolidation of the central Government.
What to expect in the Union Budget for 2025-2026, from fiscal deficit targets to priorities of spending.
Fiscal Deficit Goal for FY25
Goldman Sachs believes that the government will meet its Fiscal Deficit Target of 4,9% GDP by FY25. This is due to receipts above 0.2% GDP, and lower than budgeted capex.
Fiscal consolidation in FY26
Goldman Sachs estimates that the government will try to reduce its fiscal deficit to 4.4% to 4.6% of GDP by FY26. In Q2 of FY25, the slowdown in GDP real growth was due to the RBI tightening fiscal policy and tightening macroprudential policies in order to reduce unsecured lending. The fiscal deficit was lower for most of 2024. This resulted in growth being slowed.
In FY26, the government is expected to aim for a fiscal deficit of 4.4% to 4.6% (with 4.5% GDP being our baseline assumption). Goldman Sachs stated in a recent report that they expect total revenues to rise by 0.1 percentage points of GDP, as direct tax revenue is expected to be buoyant.
It expects that capex will remain at 3,2% of GDP, partly due to a higher transfer of capex funds to the states. The centre should relax some of its rules for the release and repayment of interest-free loans for state capex.
It said that the fiscal stimulus of central government will continue to be a major drag on economic growth for FY26.
Priorities for spending in the FY26
Global investment bank predicts that government capex will slow from 30% to 13% in FY21-24. However, there may be an increase of welfare spending or transfer payments.
In FY25, overall expenditure has remained muted, growing at ~3.0% YoY till November FYTD (fiscal-year-to-date), mainly driven by a 15% YoY contraction in capex in H1FY25 partly due to the national elections in the April-June quarter. Although capex increased in recent months, the level of expenditure in FY25 is still significantly lower than last year.
Goldman Sachs anticipates that capex will remain at 3,2% of GDP by FY26 due to the fiscal consolid path taken by the central government. The company expects rural expenditure, transfers, and subsidies will be similar to their previous trends.
It said that given the NDA’s (National Democratic Alliance’s) reduced electoral majority in 2024, some of the expenditure could be redirected to rural transfers and social welfare.
Government Bond Market for FY26
Goldman Sachs believes that the natural demand for Government Bonds will remain sufficient in FY26. However, the RBI is expected to become a net purchaser of government bond in FY26 to provide INR liquidity to the banking system, and partially offset the Rupee liquidity loss due to FX transactions.
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