High public debt crimps room for budget stimulus, analysts say

Amid growing expectations of an easing of the fiscal consolidation path in the budget later this month, analysts at Goldman Sachs said there isn’t much room to stimulate the economy given the high public debt.

Moreover, investments in infrastructure have led to long-term benefits for the economy, which policymakers might not want to compromise by shifting funds towards welfare spending, analysts at Goldman Sachs said in a note on Monday.

Union finance minister Nirmala Sitharaman will present the budget in Parliament on 23 July, Tuesday. The budget session begins from 22 July and will end on 12 August. Pre-budget consultations, which was chaired by Sitharaman, ended on Friday.

The government is likely to stick to the fiscal deficit target of 5.1% of gross domestic product (GDP) for FY25 and announce a glide path towards below 4.5% 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 RBI,” Santanu Sengupta, Arjun Verma and Andre Tilton of Goldman Sachs wrote in the note.

The board of RBI had transferred a record ₹2.11 trillion (about $25 billion), more than double of what was budgeted, as surplus to the central government for the accounting year 2023-24.

“If the higher than budgeted dividend from RBI is used for increasing expenditure, capex growth could increase to 21% year-on-year (from 17% year-on-year budget estimates) while current expenditure growth (ex interest payments) could increase to 5% year-on-year if the government sticks to its fiscal deficit target of 5.1% of GDP in FY25,” the analysts wrote.

India runs a large public debt to GDP of 84% (central: 59% of GDP, and states: 25% of GDP) compared to other emerging markets and, consequently, has a large interest burden of 3.6% of GDP.

The government can also choose to retire some of its outstanding debt, or quasi government debt with the extra dividend from the RBI, which may result in lower borrowings and thus gross issuance this year by about  ₹500bn to ₹13.6tn (against ₹14.1 trillion as per budget estimates), the analysts said.

Interest expense constitutes a large share at 5.4% of GDP and, with the primary deficit at 3.5% of GDP in FY24, it “leaves the general government with limited fiscal space for stimulus in FY25,” the analysts said in the note.

“Our fiscal impulse calculations also show that general government fiscal policy has been a drag on growth since FY22 and will remain so in FY25 and FY26, given the fiscal consolidation target of the central government,” they added.

The fiscal impulse differs from the fiscal deficit by focusing on how the deficit changes, rather than its total amount. It specifically looks at changes in the structural primary deficit and considers how different sources of deficit impact economic growth. This makes it a more accurate measure of the government’s fiscal policy approach.

The fiscal impulse, which differs from the fiscal deficit by focusing on the change rather than the level, is measured by changes in the structural primary deficit and adjusts for varying growth impacts from different deficit sources such as tax cuts and government spending, making it a better indicator of fiscal policy stance, Goldman Sachs said.

Additionally, the analysts said that the investments in infrastructure have led to long-term benefits for the economy, which policymakers might not want to compromise by shifting funds towards welfare spending.

“We think the budget will go beyond just fiscal numbers, and likely make an overarching statement about long-term economic policy towards 2047. We see an emphasis on job creation through labor-intensive manufacturing, credit for MSMEs (micro, small, and medium enterprises), continued focus on services exports by expanding GCCs (global capability centers), and a thrust on domestic food supply chain and inventory management to control price volatility,” the analysts said.