New Delhi:

With the Union Budget for FY26 scheduled to be presented on February 1, 2025, a report by Goldman Sachs underlined two key concerns for policymakers, the pace of fiscal consolidation and the government’s spending priorities.

The report highlighted that the upcoming budget will be crucial for balancing growth and fiscal discipline as India stands out for its high levels of public debt and fiscal deficit as compared with other emerging markets.

Goldman Sachs noted that the government is likely to keep the fiscal consolidation path intact, driven by the need to manage high public debt-to-GDP ratios.

However, the report cautioned that this fiscal tightening could act as a drag on economic growth in the upcoming fiscal year.

The report also highlighted a slowdown in public capital expenditure (capex). It mentioned that the fastest growth phase in public capex is now behind us, with future capex growth expected to align with or fall below nominal GDP growth rates. Welfare spending, too, is unlikely to see significant increases, although pre-pandemic trends in such spending are expected to continue.

The report noted that India is currently experiencing a cyclical growth slowdown, the report said, primarily due to fiscal tightening and slower credit growth as a result of the Reserve Bank of India’s macro-prudential measures to control consumer loans.

The central government’s fiscal deficit is expected to be targeted at between 4.4-4.6 per cent of GDP for FY26, down from the target of 4.9 per cent for FY25.

The reduction reflects the government’s focus on fiscal consolidation amid elevated public debt levels.

It said, “We think elevated public debt-to-GDP is likely to keep the fiscal consolidation path intact, and 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)”.

In the ongoing fiscal year FY25, robust tax collections, particularly from direct taxes, have provided the government some leeway to increase current expenditures. However, capital expenditure has remained subdued.

The budget is also likely to make an overarching statement about the long-term economic policy of the government towards 2047. The focus will be on job creation through labour-intensive manufacturing, credit for MSMEs, promoting rural housing programs, and sustained focus on the domestic food supply chain and inventory management to control price volatility.

The budget is also likely to lay out a roadmap for public debt sustainability, and financing India’s energy security vs. transition needs.

The expenditure on rural, welfare, transfer schemes and subsidies may go to the pre-pandemic trends (3.0 per cent of GDP in FY26). Given the reduced majority of the Central government, there might be some reallocation in expenditure towards rural transfers and welfare spending.

Beijing:

China is expanding its consumer trade-in scheme to revive demand in the sluggish household sector. The move includes adding more home appliances to the list of products eligible for trade-in and offering subsidies for digital goods. Microwave ovens, water purifiers, dish-washing machines, and rice cookers are among the new additions to the scheme.

Consumers who trade in old goods will receive subsidies of 15-20%. Cellphones, tablet computers, smart watches, and bracelets under 6,000 yuan will also be eligible for a 15% subsidy. The government has allocated 81 billion yuan ($11 billion) for the program in 2025.

The trade-in scheme was initially launched last March, with a budget of 150 billion yuan funded through special government bonds. The program was used by 36 million consumers to buy 240 billion yuan worth of home appliances, driving 920 billion yuan of car sales.

China’s top economic planning body has said the schemes have already produced “visible effects” in boosting consumer spending. However, some economists have questioned whether the schemes will be enough to significantly increase consumer demand.

“The downside of such a policy is you are just pulling forward future demand,” Hui Shan, chief China economist at Goldman Sachs said. “If I’m going to replace my air conditioner once every 10 years, [you’re] pulling the next few years of demand into now.”

This trade-in scheme is also reminiscent of former US president Barack Obama’s “cash for clunkers” initiative, through which consumers could trade in old cars for new ones, post the 2008 global financial crisis.

However, Frederic Neumann, chief Asia economist at HSBC, said that such trade-in programmes are helpful only for a short-term goal and said that China would need more policies that would aid consumption for a sustainable change.

The expansion of the trade-in scheme comes as China faces challenges such as weak consumer demand and a deepening property crisis. In December, a key meeting of China’s leaders stressed the need for “vigorous” efforts to boost consumer spending. China is due to announce its 2024 economic growth figures next week, which Beijing expects to be around 5%.