Budget 2025: From fiscal deficit to spending priorities, what to expect from Finance Minister Nirmala Sitharaman | Stock Market News

Budget 2025: Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget for FY26 on February 1, 2025. Preparing the Union Budget is a delicate balancing act for the government, as it must navigate the challenging task of maintaining fiscal discipline while addressing the aspirations of millions of citizens and businesses across the nation.

The Union Budget 2025 is being presented at a pivotal time, as global economies increasingly shift from globalization to protectionism, with tariffs emerging as a significant component of policy frameworks.

India is currently experiencing a cyclical slowdown in economic growth, driven by fiscal consolidation measures and a deceleration in credit growth due to the Reserve Bank of India’s macro-prudential tightening of consumer lending.

Moreover, in the current fiscal year FY25, robust tax collection, mainly driven by direct taxes, has given the government some space to carry out additional current expenditure, while capital expenditure has remained muted thus far.

According to Goldman Sachs, capex has likely peaked at 3.2% of GDP in FY24 and may come down further in the coming years, given the fiscal consolidation path of the central government.

From fiscal deficit target to spending priorities, here’s what to expect from the Union Budget 2025-2026.

FY25 Fiscal Deficit Target

Goldman Sachs expects the government to meet the fiscal deficit target of 4.9% of GDP in FY25, led by receipts upwards of 0.2% of GDP and lower-than-budgeted capex, despite lower nominal GDP growth.

Fiscal Consolidation in FY26

The government is estimated to try to consolidate the fiscal deficit towards 4.4% – 4.6% of GDP in FY26, according to Goldman Sachs. The slowdown in real GDP growth in Q2 FY25 was mainly driven by fiscal tightening and macro-prudential tightening by the RBI to curb unsecured lending growth. Fiscal deficit was consistently lower throughout much of 2024, resulting in a drag on growth.

“In FY26, we think that the government will aim to consolidate the fiscal deficit to 4.4% – 4.6% of GDP (with 4.5% of GDP as our base case assumption). We expect a 0.1 pp of GDP upside in total receipts as we expect direct tax revenues to remain buoyant,” Goldman Sachs said in a report.

On the expenditure side, it factors in a 0.4% of GDP reduction in current expenditure ex interest and subsidies, while it expects capex to remain at 3.2% of GDP partly aided by higher transfer to states for capex — the centre is expected to relax certain norms for the release of interest-free capex loans to states.

Overall, central government fiscal impulse will remain a drag on growth in FY26 as well, it said.

Spending Priorities in FY26

The global investment bank expects government’s capex growth to slow to ~13% YoY from over 30% in FY21-24, while there might be a tilt towards welfare expenditure or transfer payments.

In FY25, overall expenditure has remained muted, growing at ~3.0% YoY till November FYTD (fiscal-year-to-date), mainly driven by a 15% YoY contraction in capex in H1FY25 partly due to the national elections in the April-June quarter. Although capex has picked up in the last couple of months, it remains significantly below last year’s level so far in FY25.

Going forward, Goldman Sachs expects capex to remain at 3.2% of GDP in FY26, given the fiscal consolidation path of the central government. It expects expenditure on rural, welfare, transfer schemes and subsidies to be around their pre-pandemic trends (~3.0% of GDP in FY26).

Given the reduced majority of the NDA (National Democratic Alliance) in the 2024 elections, there might be some re-allocation in expenditure towards rural transfers and welfare spending, it said.

Government Bond Market in FY26

Although Goldman Sachs expects natural domestic demand for government bonds to remain adequate in FY26, it believes the RBI will have to be a net buyer of government bonds in FY26, to inject INR liquidity in the banking system and partly offset FX sales related Rupee liquidity drain.

Read Union Budget 2025 Expectations Live Updates here

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