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This is an archive article published on January 12, 2024

Govt likely to meet 5.9% fiscal deficit target: Goldman Sachs

Goldman said it expects the focus on capex to continue, but at a slower pace — 10 per cent growth in capex as a base case.

goldman sachsGoldman Sachs said it expects the upside in receipts of 0.2 per cent of GDP to be driven by higher income and corporate taxes and higher non-tax revenues on the back of higher-than- expected dividends from the RBI and PSUs.

US investment banking group Goldman Sachs has said the government is expected to meet the FY24 fiscal deficit target of 5.9 per cent of GDP in the interim budget as receipts are likely to be upwards of 0.2 per cent of GDP.

Goldman Sachs also said there are three key things for investors to look out for in the interim budget: the government’s commitment to the medium-term fiscal consolidation path, if capex growth can continue with fiscal consolidation and the supply of government bonds that the market may be able to absorb.

If spending remains muted in the current quarter, the deficit may end up at 5.8 per cent of GDP, it said. “In FY25, we think the government will try to consolidate the fiscal deficit to 5.2-5.4 per cent of GDP (with 5.3 per cent of GDP as our base case) given their medium-term fiscal consolidation target of reaching 4.5 per cent of GDP by FY26,” Goldman Sachs said in its interim budget outlook.

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Goldman said it expects the focus on capex to continue, but at a slower pace — 10 per cent growth in capex as a base case — than what has been seen in the last few years (over 30 per cent annual growth between FY21 to FY24 BE) given the fiscal constraints.

However, government borrowing in FY25 is likely to remain elevated, it said. “With adequate demand for government bonds from FIIs and domestic investors in a policy rate easing cycle, we believe the RBI may be a net seller of government bonds in FY25,” Goldman Sachs said. It said the RBI is expected to make two repo rate cuts of 25 bps each in Q3 and Q4 CY24.

In the current fiscal year FY24 (April 2023 to March 2024), robust tax collection, mainly driven by direct taxes, has given the government some fiscal space to carry out additional spending and yet meet the fiscal deficit target of 5.9 per cent of GDP, it said.

The US bank said the government capex has aided overall investment growth in recent years, and it expects 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. It said the central government is expected to announce a fiscal deficit target in the range of 5.2-5.4 per cent of GDP (with 5.3 per cent of GDP as its base case) in FY25 given their medium-term fiscal consolidation target of reaching 4.5 per cent of GDP by FY26.

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Goldman Sachs said it expects the upside in receipts of 0.2 per cent of GDP to be driven by higher income and corporate taxes and higher non-tax revenues on the back of higher-than- expected dividends from the RBI and PSUs.

On the expenditure side, it expects an upside of around 0.4 per cent of GDP driven by higher expenditure on major subsidies (0.2 per cent of GDP) and higher expenditure on the rural employment programme (0.2 per cent of GDP) (MGNREGA). Around half of this increase in expenditure would be met by an increase in total receipts, while the rest would be reallocated from other current expenditure, it said.

The government has focused on raising capex spending by over 30 per cent CAGR over the last three years, raising the budgeted capex target to 3.3 per cent of GDP, the highest in 18 years. “They will likely meet the capex target in FY24, given the upside from gross tax revenues. However, we expect capex growth to decline to around 10 per cent in FY25 over our revised estimate for FY24, given the medium-term fiscal consolidation path of the government,” it said.

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