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Union Budget 2015: Goldman Sachs sees healthy GDP, 3.6% fiscal deficit target

The brokerage house believes the critical macro event will be closely watched for clarity on the government’s finances and intentions of structural reforms.

The News International TeamThe 2015 Union Budget is the first full Budget to be announced by the Modi government. Brokerage house Goldman Sachs expects Finance Minister Arun Jaitley to announce a deficit target of 3.6 percent of GDP for FY16; a clear roadmap for goods and services tax (GST) and no significant drag in GDP because of the recent spending cuts.

The brokerage house believes the critical macro event will be closely watched for clarity on the government’s finances and intentions of structural reforms.

India’s macro-economic backdrop has improved significantly and the steep fall in crude prices will benefit the government’s finances, says the report.

Goldman Sachs also expects to see a shift from subsidies to capital spending on public projects.

“We do not expect a significant drag on GDP growth as we expect the impact of higher capital spending to compensate for the reduction in current spending growth,” says the report.

Furthermore, Goldman Sachs believes the Budget will be positive for most sectors, particularly financials, infrastructure and capital goods.

“The mid-term review alluded to the need for greater public investment to drive economic growth, given constraints in the private sector’s balance sheet. We expect the 2015 budget to embark on increased budgetary support for investments. We expect capital spending to rise from an estimated 1.7 percent of GDP in FY15 to 2 percent of GDP in FY16,” says the report.

Excerpts from the report:

We expect a central fiscal deficit target of 3.6 percent of GDP for FY16, in line with the government’s medium-term fiscal consolidation path. This is largely due to a reduction in subsidies as a result of lower commodity prices.

The brokerage doesn’t expect a significant drag on GDP growth as it expects the impact of higher capital spending to compensate for the reduction in current spending growth.

The reduced borrowing requirement of the government can be comfortably financed, according to our estimations. The brokerage’s March 2016 10-year bond yield forecast is 7.5 percent, with risks to the downside.

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