Goldman Sachs highlighted two critical challenges ahead of the Union Budget for the financial year 2025-2026 (FY26) namely managing fiscal consolidation and prioritizing government spending.

It said these challenges could play a crucial role in shaping India’s economic trajectory amid high public debt levels and fiscal deficit compared to other emerging markets.

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The report said the fiscal deficit tightening could slow economic growth, which is already experiencing a cyclical downturn due to reduced public spending and tighter credit policies.

India has been facing the challenge of reducing its fiscal deficit while sustaining economic growth for several years.

The fiscal deficit target for FY26 is expected to be set at 4.4-4.6% of GDP, a reduction from 4.9% in FY25.

The report also highlights a slowdown in public capital expenditure (capex). Welfare spending will likely revert to pre-pandemic trends, with allocations expected to be around 3% of GDP in FY26.

Goldman Sachs said some of the likely focus areas include promoting labour-intensive manufacturing sectors, enhancing support for small and medium enterprises, expanding housing programmes in rural areas, strengthening infrastructure to control price volatility, balancing energy security with sustainable development goals among others.

India’s elevated public debt-to-GDP ratio remains a concern. A reduction in the general fiscal deficit from 8% in FY25 to 7% by FY30 is critical to keeping public debt sustainable, the report said.

Fiscal consolidation will help reduce this ratio over time, creating more room for economic growth and financial stability.

According to the report, robust tax collections in FY25, particularly from direct taxes, have given the government some flexibility in increasing current expenditures. However, capex spending has remained lower than budgeted, providing additional room to meet fiscal deficit targets.