INDIA: Goldman Sachs On Indian Budget

Goldman Sachs: "The central government stuck to the fiscal consolidation path in the first full budget of its third term: It targeted fiscal deficit at 4.4% of GDP in FY26 (lower end of our estimate of 4.4 - 4.6% of GDP) from the revised estimate of 4.8% in FY25 (5.6% in FY24). It also committed to keep the central government public debt (as a % of GDP) on a declining path towards 50% of GDP by FY31 from 56.1% of GDP in FY26.

A tilt towards the urban consumer: Despite the fiscal consolidation, the government readjusted income tax slabs to provide 0.3% of GDP tax relief to personal income tax payers. We believe this will partly help the indebted urban consumer deleverage (and boost net household financial savings), and partly boost consumption in a section of urban households. The net fiscal impulse drag on growth in FY26 will be smaller than in FY25.

Somewhat optimistic income tax collection target: Despite the tax revenue foregone, the government has budgeted income tax to GDP at 4.0% (from 3.9% in FY25). This, in our view, assumes a significant improvement in tax buoyancy (net of tax foregone), absent which, spending cuts will be required to meet the fiscal deficit target.

Capex - Baton passed on to States: Central government capex is budgeted to remain flat (over FY25) as a share of GDP, at 3.1%, in line with our long-standing view. Further, capex allocation to states (sub-national governments) is up 22% yoy at 0.5% of GDP, which likely indicates that the government is passing the capex baton on to states. Defense capex allocation is up 13% yoy, while roads and railways are flat. Given that the government has fallen ~0.1% of GDP (average FY23-FY25 RE) short of spending the budgeted capex, a potential spending cut in case of revenue shortfall may likely be funded from here.

RBI will be a net buyer of bonds in FY26: Even with a lower fiscal deficit, the net market borrowing via bonds was only marginally lower (in level terms), while other sources of financing were cut by 0.1% of GDP. As we have written recently, though natural domestic demand for bonds is likely to remain adequate, we believe the RBI will have to be a net buyer of government bonds in FY26, to partly offset the Rupee liquidity drain from FX sales."