Fiscal Consolidation Or Welfare? Budget FY26 To Balance Debt, Rural Support, And Subsidies: Goldman Sachs Report

As the Union Budget for Financial Year 2025-26 (FY26) approaches, a Goldman Sachs report has identified two critical areas for policymakers: the pace of fiscal consolidation and spending priorities. 

With the presentation scheduled for 1 February 2025, the government faces the challenge of navigating fiscal discipline while fostering economic growth.

Goldman Sachs projects that fiscal consolidation will remain a central focus, aiming to reduce the fiscal deficit target to 4.4-4.6 per cent of GDP for FY26, down from 4.9 per cent for FY25. 

This reflects the government’s commitment to managing high public debt-to-GDP ratios, although such tightening may dampen economic growth in the short term.

Public Capex and Welfare Spending Slowdown

The report points to a deceleration in public capital expenditure growth, noting that future increases are likely to align with or fall below nominal GDP growth rates. 

Welfare spending, while expected to align with pre-pandemic trends, may not see significant expansion. Expenditure on rural and welfare schemes is projected at 3.0 per cent of GDP for FY26, marking a cautious approach.

Long-term Economic Policy Outlook

The FY26 Budget is anticipated to outline a long-term economic vision, targeting key areas such as job creation through labour-intensive manufacturing, MSME credit access, rural housing, and food supply chain resilience to curb price volatility. Additionally, the budget will likely address public debt sustainability alongside energy security and transition goals.

With the reduced majority of the central government, reallocation toward rural transfers and welfare spending is anticipated, signalling a responsive approach to socio-economic challenges while maintaining fiscal discipline.