India's elevated public debt restricts the potential for welfare expenditure

On Monday, a foreign brokerage stated that India's substantial public debt restricts the ability to implement welfare programs that could boost the economy. Goldman Sachs's report, released weeks before the budget presentation, suggests that Finance Minister Nirmala Sitharaman is likely to adhere to the fiscal consolidation plan by maintaining the 5.1 % fiscal deficit goal set in the interim budget.

Investors are anticipating some easing in the fiscal consolidation plan and a transition to prioritizing welfare spending over capital expenditure in the budget.

Nevertheless, the brokerage suggested that this is not a feasible option.

The current fiscal deficit target of 5.1% may be reduced to 4.5% in FY26, with limited room for stimulus in FY25 due to high-interest expenses of 5.4% of GDP in the government budget. It was stated that our calculations indicate that overall government fiscal policy has been holding back growth since FY22 and will continue to do so in FY25 and FY26 due to the central government's goal of fiscal consolidation.

It was reported that capital expenditure increased by a strong 31% during the fiscal years 2021-2024, contributing to growth.

The brokerage stated that the upcoming budget could focus on more than just fiscal numbers, and prioritize the creation of jobs.

This may involve a focus on labor-intensive production, providing credit to small businesses, and expanding global capability centers to drive service exports. The report noted that it could also impact the domestic food supply chain and inventory management to manage price fluctuations.

It could also provide a direction for the future of public finance in India, including a plan for public debt sustainability and green finance.