In the imminent interim budget, the government is anticipated to adhere to a fiscal consolidation approach, with Goldman Sachs suggesting a potential announcement of a fiscal deficit target amounting to 5.3% of the gross domestic product (GDP) for the fiscal year 2024-25 (FY25). According to a report titled 'Asia in Focus' by Goldman Sachs, there is also a likelihood of a substantial slowdown in the rate of government spending on capital expenditure (capex) during FY25, projecting a reduction to around one-third of the expenditure levels observed in the preceding three years.
The report notes that government capex has played a pivotal role in overall investment growth in recent years, and while the focus on capex is expected to persist, the pace is likely to decelerate compared to the robust levels seen in the recent past. This adjustment aligns with the central government's medium-term fiscal consolidation path.
Over the last three years, the government consistently increased capex spending, achieving a Compound Annual Growth Rate (CAGR) exceeding 30%. During this period, the budgeted capex target reached 3.3% of the GDP, marking the highest level in 18 years.
Goldman Sachs indicates that the central government is on track to meet its fiscal deficit target of 5.9% of the GDP for the current fiscal year, FY24. The report cites robust tax collection, primarily driven by direct taxes, as a contributing factor, providing the government with fiscal flexibility to engage in additional spending while still adhering to the fiscal deficit target.
As the government prepares for the upcoming budget, these insights from Goldman Sachs suggest a cautious approach to fiscal management, emphasizing a slowdown in capital expenditure and adherence to fiscal consolidation goals.
