The Union Budget 2024-25 will go beyond just fiscal numbers, and likely make an "overarching statement" about the long-term economic policy of the government towards 2047, with an emphasis on job creation, credit for MSMEs, continued focus on services exports, and a thrust on domestic food supply chain and inventory management, according to the latest report by Goldman Sachs.

The central government will announce the final Union Budget for FY25 (March 2024-April 2025) on July 23, 2024.

The economic research wing of Goldman Sachs, in its latest report "India’s Fiscal policy: Union Budget Preview: Beyond the numbers", says the government could give a thrust on food supply chain and inventory management domestically to control price volatility. "This is likely to happen through a focus on rural infrastructure for better connectivity, incentivising domestic food production, cold storage and food processing."

The job creations can happen through labour-intensive manufacturing while integrating GVCs, with possible beneficiary sectors including textile, footwear, and toys, etc, says the report. Additionally, MSMEs in India produce 30% of output (gross volume average as of FY22) and employ over 120 million workers. Support for MSMEs could come in the form of credit or fiscal incentives, says Goldman Sachs. The government could also focus on skilling through vocational programs or on-the-job training. Additionally, the Centre is expected to put continued focus on services exports through expanding Global Capability Centres (GCCs), Global Technology Centres (GTCs) and Global Engineering Centres (GECs).

The report says there is a growing expectation among some investors that India’s final Union budget for FY25 will see some relaxation in the fiscal consolidation path and a pivot towards welfare spending from capex. Pushing back against both views, Goldman Sachs says there is "limited fiscal space to stimulate the economy", given high public debt, and that India’s infrastructure upgrades have created long-term positive growth spillovers, which policymakers may not be willing to give up.

Goldman Sachs expects the general government to stick to the announced fiscal deficit target of 5.1% of GDP for FY25, or even slightly lower, and announce further consolidation to a deficit of below 4.5% of GDP by FY26. It says that even if there is some expenditure allocation towards welfare spending, it may not require a reduction in capex, given the higher-than-expected dividend transfer from the RBI.

"In the general government’s budget, interest expense constitutes a large share at 5.4% of GDP and with the primary deficit at 3.5% of GDP in FY24, this leaves the general government with limited fiscal space for stimulus in FY25," write Goldman Sachs economists, adding that the general government fiscal policy has been a drag on growth since FY22 and will remain so in FY25 and FY26, given the fiscal consolidation target of the central government.

It also says the central government’s fiscal impulse breakdown suggests the very robust capex CAGR of 31% over FY21-24 resulted in a growth boost, while welfare spending has been a net drag since FY22. "In FY25, we expect capex to provide a positive impulse, while welfare spending will likely remain a drag."

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