Goldman Sachs predicts a considerable deceleration in the pace of government spending on capital expenditure (capex) for the fiscal year 2025. The projection indicates that capex growth may fall to as much as one-third of the increase observed in the preceding three years.
"Government capex has aided overall investment growth in recent years, and we 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," wrote the economists in their report on expectations from the FY25 interim Budget report.
In the past three years, the government has consistently increased capex spending at a CAGR exceeding 30 percent. During this period, the budgeted capex target reached 3.3 percent of the GDP, marking the highest level in 18 years.
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In FY25, however, the economists expect the capex growth to decline to around 10 percent yoy.
The economists, who estimate that the government will be able to meet its fiscal deficit target of 5.9 percent of GDP in FY24, think that the government will try to consolidate the fiscal deficit to 5.2-5.4 percent of GDP in FY25.
The spending on subsidies is also forecasted to come down to 1.6 percent of GDP in FY24 to 1.4 percent of GDP in FY25. Only subsidies for fertilisers is expected to go slightly above the pre-pandemic average.
The report stated, "The government announced a host of measures in 2H-2023 to mitigate the impact of food and oil supply shocks on the consumer. Firstly, they extended the free food program to 800mn+ beneficiaries for the next five years, which we expect to cost 0.7 percent of GDP in FY25. Secondly, we expect cooking gas subsidy to be below 0.1 percent of GDP on the back of lower oil prices. Finally, we expect fertiliser subsidy to be slightly above the pre-pandemic average of 0.5 percent of GDP in FY25 as we expect natural gas prices to increase from the lows seen in December 2023."
On the "imperative" of fiscal consolidation, the economists pointed out that India is a regional and Emerging Market (EM) outlier on both flow and stock of government debt.
Fiscal balance, which is the difference between a government's revenue and expenditure, is expressed as a percentage of GDP.
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