Ahead of budget 2025-26, Foreign banks, brokerages and consultancies expect the government to likely outperform on its FY25 fiscal consolidation target, closing the year at 4.8 per cent of GDP versus 4.9 per cent budgeted for the current fiscal.
The main reason for the outperformance could be weaker than budgeted public capex, due to slower approvals in an election year, said economists from foreign banks.
Pranjul Bhandari, Chief Economist, India and Indonesia, HSBC Global Research said “Led by lower capex, the government will likely overachieve on its fiscal consolidation target in FY’25 (at 4.8 per cent of GDP”.
Bhandari highlighted that elections impacted States too and that State Government card slowed alongside central capex, given the close coordination required for large infrastructure projects. “The State fiscal deficit is likely to inch lower in FY’25, but then rise again in FY26, lower than 7.6 per cent in FY’25, but higher than the pre-pandemic level of 5.9 per cent, keeping public debt elevated,” Bhandari said in a research note titled “India Budget Preview: Mission Impossible”.
HSBC Global Research expects two rate cuts of 25 basis points each in first half of 2025, taking the repo rate to 6 per cent. External volatility and a lower BoP surplus may make this a shallow rate easing cycle, though easier liquidity will help.
Anubhuti Sahay, Head India Economic Research, Standard Chartered Bank India expects the FY25 fiscal deficit to come in at 4.8 per cent versus the targeted 4.9 per cent.
“We expect the FY25 fiscal deficit to be better than targeted 4.9 per cent of GDP. We estimate it at 4.8 per cent as capital expenditure is expected to be lower than budgeted, more than offsetting a small shortfall in revenue receipts. For FY’26 we expect the fiscal deficit to be set at 4.5 per cent, in line with stated path”, Sahay said in a research note.
Sahay also said that reliance on RBI dividends is likely to remain high in FY26 to achieve fiscal consolidation.
“If economic activity and the broader macro environment turn out to be more conducive than anticipated, FY26 fiscal deficit target could be narrower than we currently expect, as has been the case in recent years. However, as the Finance Minister has stayed in line with the States fiscal consolidation path since FY21, we think a 4.5 per cent target is likely to be set”, she added.
Standard Chartered Global Research sees limited room for a large consumption boost in upcoming budget due to limited fiscal space, even as growth is moderating and external environment remains uncertain.
The combined (Centre + States) fiscal deficit for FY’26 is likely to narrow to 7.2 per cent of GDP from 7.45 per cent in FY’25, driven by Central government fiscal consolidation, Sahay added.
Santanu Sengupta, India Chief Economist, Goldman Sachs India said that elevated public debt-to-GDP is likely to keep the fiscal consolidation path intact. “We expect the government to target fiscal deficit at 4.4-4.6 per cent of GDP in FY26 (from 4.9 per cent of GDP in FY25)”, Sengupta said in a Budget Preview note titled “Policy choices in a cyclical growth”.
The budget is also likely to lay out a roadmap for public debt sustainability and financing India’s energy security vs transition needs.
A receipts upside of 0.2 per cent of GDP and lower-than-budget capex will likely enable the government to meet the fiscal deficit target of 4.9 per cent of GDP for FY’25 despite lower nominal GDP growth of 9.7 per cent, Sengupta added.
Rumki Majumdar, Economist, Deloitte India said “We believe India will stick to its target over the next few years as fiscal prudence is the only path forward to secure the investment required for sustainable growth”.
She highlighted that maintaining fiscal deficit within the target is important as it serves as a critical benchmark for global investors assessing a country’s reliability as an investment destination.
“Fiscal discipline signals that the government has a firm control over its finances, inspiring global investors the confidence needed to invest in India.
Today India needs foreign capital to fund infrastructure, and bolster manufacturing and energy generation capabilities to be self reliant. All these are inherently capital-intensive and India will need additional resources beyond its domestic savings and know how”, Majumdar added.