As per the analysts at Goldman Sachs, the upcoming budget on July 23 is likely to stick to the path of fiscal consolidation. The analysts expect Finance Minister Nirmala Sitharaman’s Modi 3.0 budget would focus on the broader economic agenda rather than carrying out minor stimulus measures.

Goldman Sachs stated that there is limited fiscal space to stimulate the economy considering the high public debt. Apart from that, India’s infrastructure developments have created long-term positive growth spillovers, wherein, they believe that policymakers might not be willing to give up..

Andrew Tilton, Chief Asia-Pacific Economist & Head at Economic Research at Goldman Sachs in a note co-authored with Santanu Sengupta and Arjun Varma wrote, “The government will use the budget as an opportunity to make a big picture statement about the long-term economic policy vision over the next several years, rather than minor stimulus announcements. These are likely going to align with the government’s development agenda for 2047 (coinciding with the centennial of Indian independence).”

Goldman Sachs further believes that the government is likely to stick to the announced fiscal deficit target of 5.1 percent of GDP for FY25 or even slightly lower while announcing more consolidation to a deficit of below 4.5 percent of GDP by FY26.

"Even if we see some expenditure allocation towards welfare spending, it may not require a reduction in capex given the higher than expected dividend transfer from the Reserve Bank of India (RBI). If the government chooses to change income tax policy, based on our assessment of hypothetical scenarios, the revenue loss of the government is likely to be around 5-15bp of GDP with the fiscal impulse being meager around 2-7bp in FY25," they said.

As per the research, Nirmala Sitharaman's Modi 3.0 budget is likely to focus on  some of the areas which includes job creation through labor-intensive manufacturing, credit for MSMEs, thrust on domestic food supply chain and inventory management, and continued focus on services exports by expanding GCCs to mitigate price volatility.

What Coalition Expects?

Goldman Sachs has also highlighted that the budget is likely to chart out a roadmap for the future of public finance in India, with focus on public debt sustainability, and green finance. In ten years, this is the first time that the Bharatiya Janata Party (BJP) will be running a government without a majority of its own in the Lok Sabha. With this, a reduced political mandate will require more political capital to be spent behind passing structural reforms like land reform and farm sector reforms, said the analysts at Goldman Sachs.

As the coalition partners, Andhra Pradesh and Bihar might also aim to reduce their debt burden if they receive any assistance from the center in the upcoming budget; which is at 33 percent/36 percent of state GDP (as per FY24 BE). The note said, “In our view, the allocation from the center might not be large as a hypothetical transfer of 0.1 percent of national GDP to the states would in itself imply a 3 percent / 2 percent of state GDP boost to Bihar / Andhra Pradesh.”