Budget 2026: Goldman Sachs Flags Muted Capex Ahead as India Tightens Fiscal Purse Strings

SYNOPSIS: Goldman Sachs expects muted capex growth as weak tax collections pressure fiscal balances. With revenues lagging, the Centre may tighten expenditure further, risking slower infrastructure momentum while aiming to meet FY26 deficit targets.

The Union government is likely to achieve its fiscal deficit target for FY26 by scaling back capital expenditure to compensate for possible shortfalls in income tax and GST revenues, according to a report by Goldman Sachs.

India’s capex in October recorded a steep 28 percent year-on-year decline, largely due to reduced transfers to states, even as defence outlays remained steady. Global brokerage firm Goldman Sachs highlighted that this is among the sharpest monthly drops seen in the current fiscal year, signalling the Centre’s efforts to restrain the deficit.

For the April-October period, the fiscal deficit stood at 4 percent of GDP, amounting to 52.6 percent of the full-year target. Goldman Sachs noted that, excluding the COVID pandemic years, this is the lowest share of the target reached during this timeframe since 2011. The brokerage anticipates that the Centre will meet its FY26 fiscal deficit goal of 4.4 percent by tightening expenditure, particularly through a more measured approach to capital spending.

Revenue Trends Show Broad Slowdown: Goldman Sachs noted a broad decline in receipts for the month, with total collections falling 18.4 percent year-on-year and revenue receipts dropping 17 percent. While income tax collections grew 26.9 percent compared to last year, they declined 23 percent on a month-on-month basis. Corporate tax revenues also posted strong annual growth of 76.4 percent but slipped sequentially.

Indirect taxes contracted by 5 percent YoY, driven largely by an 11.4 percent fall in GST collections following the rate cuts implemented in late September. By October, GST receipts had reached only 51.5 percent of the full-year target. Non-tax revenues fell sharply by 45.3 percent YoY for the month, though they remained elevated on a year-to-date basis due to earlier dividends from the RBI.

Expenditure Trends: Overall government spending also softened in October, with total expenditure declining 11 percent YoY. Revenue expenditure fell 8 percent, though the underlying components showed mixed movement. Interest payments rose 17.5 percent YoY, while subsidy outlays increased by 30 percent. In contrast, revenue expenditure excluding interest and subsidies saw a steep drop of 25.5 percent. Goldman Sachs attributed the sequential rise in revenue expenditure primarily to higher interest costs.

Capex experienced the most significant pullback, contracting 28.3 percent YoY. The bulk of this reduction stemmed from a sharp fall in transfers to states, which have been volatile in recent months. Spending by key infrastructure ministries – including Railways and Road Transport & Highways – also remained muted, while defence capex continued to show resilience.

Sequential Movement and Fiscal Position: On a month-on-month basis, Goldman Sachs observed a 32 percent drop in capex compared from September, signalling deliberate spending restraint in areas where deferrals are feasible without immediate operational impact.

For the fiscal year so far, capex has reached 55.1 percent of the budgeted amount, revenue expenditure has touched 50.9 percent, and total expenditure stands at 51.8 percent. According to Goldman Sachs, these figures indicate that the government has utilised just over half of its annual spending capacity by the end of October, providing flexibility to recalibrate outlays in response to revenue trends in the remaining months of the year.

Impact of muted capex: A 28 percent drop in public capex within a single month carries notable macroeconomic and sectoral consequences. State transfers play a crucial role in funding road construction, urban development, water infrastructure, and other public works that underpin India’s infrastructure growth. When these transfers decline sharply, project execution slows, contractor payments get delayed, and state-level planning becomes more uncertain, potentially disrupting long-term development pipelines.

Pressure from Weak Tax Collections: Simultaneously, October’s softness in income tax and GST revenues adds complexity to fiscal planning. Although income and corporate tax collections showed strong growth compared to last year, they weakened significantly on a month-on-month basis. GST receipts, affected by recent rate cuts, are expected to remain subdued. Goldman Sachs highlighted that this trend will likely keep the receipts side under pressure in the coming months.

In such an environment, the Centre may rely more heavily on expenditure adjustments to stay aligned with its fiscal deficit target. Capital spending often becomes the primary lever, as many projects can be deferred without immediate economic fallout. However, repeated expenditure tightening risks slowing the infrastructure momentum that has supported economic activity in recent years.

Rising Interest Payments Narrow Fiscal Space: Higher interest costs are also consuming a growing share of government resources. With interest payments reaching 52.8 percent of the full-year budget estimate by October, Goldman Sachs noted that the government’s room for discretionary spending narrows as the fiscal year progresses. This further limits flexibility in managing both developmental and operational priorities.

Conclusion: Fiscal Consolidation Likely to Persist

Goldman Sachs anticipates that fiscal consolidation will remain a defining theme through the rest of FY26. With revenue collections trailing expectations, the Centre is likely to continue relying on expenditure reprioritisation as its main lever for staying on course with the deficit target. The brokerage expects GST weakness and volatility in direct tax collections to persist in the near term, heightening the risk that infrastructure spending may face further moderation if revenue flows do not stabilise. In this environment, fiscal management will require a delicate balance, protecting growth-critical investments while maintaining discipline to meet the fiscal roadmap.

Written by Shivani Singh

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