Potential targets for the Union Budget

Spending the allocated FY25 capex in the near term, preserving the quality of the fisc, and going ahead with next-generation reforms, along with sticking to the consolidation roadmap, will be the cornerstones of Budget FY26

- Samiran Chakraborty

The macro backdrop to the upcoming budget is somewhat different from the last two years when the importance of fiscal consolidation was not a matter of much debate. This year, there are multiple budget priorities that might sometimes be conflicting.

Arresting a cyclical slowdown early and preserving macro-stability through a credible fiscal consolidation roadmap will likely be the twin pillars of the FY26 budget math. Rising global uncertainties could pose some challenges in meeting these twin objectives. On top of it, near-term asset market volatility probably warrants a conservative approach to budget making. However, beyond the math, the budget can outline the reform initiatives in different areas that will be pushed forward over the next few years, supporting the structural growth outlook.

It is expected that the government will better its FY25 fiscal deficit target of 4.9% of Gross Domestic Product (GDP). While this is a positive setup for the promised consolidation to 4.5% of the GDP by FY26, there is some argument over whether the government should skip the compression for a year to support growth. We think that even if the government opts for the fiscal consolidation path in FY26, a judicious frontloading of the available fiscal space in FY25 itself could provide the near-term impetus to growth. Union government capex growth could be higher than 30% year-on-year in the last quarter of FY25, given that it has been sluggish in the earlier part of the year. This spending, in turn, could have a positive impact on consumption as the cash flows through the economy.