The Indian government is likely to cut investment spending in the coming years in an effort to reduce its budget deficit, Goldman Sachs has predicted.
Recent rapid growth in capital expenditure “cannot be sustained going forward,” as the country’s authorities are aiming to slash the fiscal gap by around 1.5 percentage points in the next two years, Goldman economists Santanu Sengupta, Arjun Varma and Andrew Tilton wrote on Monday.
Investment has been a strong driver of the Indian economy, contributing three percentage points to the growth of its gross domestic product (GDP) of 7% annually between 2004 and 2012, Goldman Sachs estimated.
The Indian government has set aside a record 10 trillion rupees ($120 billion) for investment in the fiscal year through March 2024, and is now committed to reducing its budget deficit from 5.9% of GDP this year to 4.5% in 2025-2026.
The private sector accounts for around 75% of investment in the country’s economy, but the pace of funding has slowed over the past decade due to factors such as a sluggish property market, tighter borrowing conditions, and falling savings.
According to economists, however, the private sector is expected to step up and fill the gap as the government pulls back on spending. With businesses looking to “diversify beyond China manufacturing locations,” and the ‘Make in India’ initiative promoting local production, private sector investment could bounce back, Goldman predicted.
Demand from households and companies in India has grown stronger following the pandemic, with credit card spending hitting all-time highs and banks doubling their retail loan portfolios since 2019.
Goldman Sachs economists forecast that private investment activity will increase in the coming years due to growing domestic demand and the easing of supply-related bottlenecks.
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