Budget 2024: 5 essential questions for investors answered by Goldman Sachs

Budget 2024: Goldman Sachs in its report on FY25 interim budget say that interim budget is likely to follow the fiscal consolidation path

Three key things for investors to look out for in the interim budget as per Goldman Sachs include:

a) the government’s commitment to the medium-term fiscal consolidation path,

b) if capex growth can continue with fiscal consolidation, and

c) the supply of government bonds that the market may be able to absorb.

Interim union budget preview

The central government will present the interim budget on February 1, 2024, before the national elections expected to be held in the second quarter of calendar year 2024.

In the current fiscal year FY24 (April 2023 to March 2024), robust tax collection, mainly driven by direct taxes, as per Goldman Sachs has given the government some fiscal space to carry out additional spending and yet meet the fiscal deficit target of 5.9% of GDP. Government capex has aided overall investment growth in recent years, and they expect the focus on capex to continue, but at a slower pace than what has been seen in the last few years, given the medium-term fiscal consolidation path of the central government.

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Goldman Sachs expect the central government to announce a fiscal deficit target in the range of 5.2 – 5.4% of GDP (with 5.3% of GDP as their base case) in FY25 given their medium term fiscal consolidation target of reaching 4.5% of GDP by FY26.

Five questions before the India Union budget

Goldman Sachs in their report answers five key investor questions before the India Union budget for fiscal year 2025 (April 2024-March 2025):

1: Will the government meet the 5.9% of GDP fiscal deficit target in FY24?

Goldman Sachs says that the receipts upside of 0.2% of GDP will help the government meet the fiscal deficit target. In fact, if spending remains muted in the current quarter, they may end up consolidating to 5.8% of GDP.

They expect the upside in receipts of 0.2% of GDP to be driven by higher income and corporate taxes, and higher non-tax revenues on the back of higher-than-expected dividends from the RBI and PSUs

On the expenditure side, they expect an upside of around 0.4% of GDP driven by higher expenditure on major subsidies (0.2% of GDP) and higher expenditure on the rural employment program (0.2% of GDP) (MGNREGA).

Putting this together, Goldman Sachs expect the government to meet its fiscal deficit target of 5.9% of GDP despite nominal GDP growth projections of 8.9% year-on-year for FY24 as per the first advance estimates below the growth assumption of 10.5% in the budget document.

2: What are likely to be the spending priorities in FY25?

Goldman Sachs expects the focus of the Government on capex to continue, but at a slower pace (we expect 10% yoy growth in capex) than what has been seen in the last few years (over 30% CAGR between FY21 to FY24 BE

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3: How much fiscal consolidation is likely in FY25?

Analysts at Goldman Sachs think the government will try to consolidate the fiscal deficit to 5.3% of GDP given their medium-term fiscal consolidation target of reaching 4.5% of GDP by FY26

4: Why is fiscal consolidation important?

Goldman Sachs says that India is a regional and emerging markets outlier on both flow and stock of government debt, with a general government debt above 80% of GDP, hence the imperative for fiscal consolidation

5: Will the RBI be a net seller in the government bond market in FY25?

Goldman Sachs says that with adequate demand for government bonds from FIIs and domestic investors in a policy rate easing cycle (we expect two repo rate cuts of 25bp each in Q3 and Q4 CY24), we believe the RBI may be a net seller of government bonds in FY25.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions