Indian economy, high public debt & welfare measures

A foreign brokerage has highlighted concerns over India's high public debt, stating that it restricts the government's ability to implement welfare measures that could stimulate economic growth. The report, released on Monday, emphasizes that while welfare initiatives are crucial for boosting demand and supporting vulnerable populations, the significant debt burden limits the fiscal flexibility required for such measures.
In a report that comes weeks ahead of the presentation of the budget, Goldman Sachs reportedly stated that Union Finance Minister Nirmala Sitharaman may continue on the fiscal consolidation roadmap, sticking to the 5.1 per cent fiscal deficit target announced in the interim budget. It stated investors are expecting from the budget some relaxation in fiscal consolidation path and a shift in focus to welfare spending from capital expenditure. 
However, the same is not plausible, the brokerage hinted. "There is limited fiscal space in our view to stimulate the economy given high public debt, (and) India's infrastructure upgrades have created long-term positive growth spillovers which policymakers may not be willing to give up," it reasoned. It said that the final fiscal deficit target may also be lowered from the present 5.1 per cent, and Sitharaman may further reduce the number to 4.5 per cent in FY26. Even if there is "some expenditure allocation" towards welfare spending, it may not require a reduction in capex given the Rs 2.1 lakh crore dividend transfer from the Reserve Bank, it said. There is a limited fiscal space for stimulus in FY25, it said, pointing out that interest expense constitutes a large share at 5.4 per cent of GDP in the general government's budget.
"Our fiscal impulse calculations also show that general government fiscal policy has been a drag on growth since FY22 and will remain so in FY25 and FY26 given the fiscal consolidation target of the central government, "it said.Capex grew at a healthy 31 per cent between FY21-24, giving a boost to growth, according to information.
To address these challenges, the report suggests that the upcoming budget may go beyond just fiscal numbers, and lay emphasis on job creation. For this it may focus on labour-intensive manufacturing, credit for small businesses, continued focus on services exports by expanding global capability centres. It may also have a thrust on domestic food supply chain and inventory management to control price volatility. Further, It may also lay out a path for the future of public finance in India, which will entail a roadmap for public debt sustainability, and green finance, indicates report.
Moreover, the report underscores the potential social consequences of constrained welfare spending. Without sufficient welfare measures, there is a risk of widening economic inequality and increasing poverty levels, which could undermine long-term growth prospects and social stability. As India seeks to recover and grow in a sustainable manner, managing public debt while ensuring the availability of resources for critical welfare programs remains a delicate balancing act. Policymakers are urged to adopt a strategic approach to debt management, ensuring fiscal policies support both immediate welfare needs and long-term economic health.

(Writer is a Finance Research Analyst, based in Gandhinagar, Gujarat)