Lower reduction in fiscal deficit is to stimulate demand in a weak economic environment post demonetisation.
The government is likely to set fiscal deficit target in the range of 3.3-3.4 per cent of GDP for the financial year 2017-18 in the upcoming Budget, say research reports.
The Budget for the financial year 2017-18 will be presented on February 1.
"We think that the government will have to tread very carefully between the need for stimulating demand in a weak economic environment after demonetization and continuing on the path of fiscal consolidation. We expect the government to budget for a fiscal deficit target of 3.3 per cent of GDP, 30 basis points higher than planned in the government’s medium-term fiscal consolidation program," Goldman Sachs said in its research report.
It said the lower reduction in fiscal deficit is to stimulate demand in a weak economic environment post demonetisation announced in early November.
An SBI internal research report, Ecowrap, has pegged in a "fiscal deficit target of Rs 5.75 lakh crores for the financial year 2017-18, at 3.4 per cent of GDP."
Fiscal deficit for the financial year 2016-17 is budgeted at 3.5 per cent.
The Goldman Sachs report said the government is likely to meet its budget deficit target of 3.5 per cent of GDP for the financial year 2016-17 due to better-than-expected tax revenue growth and via some adjustment to capital spending.
Higher revenues from duties on oil (0.3pp higher than budgeted) should help the government achieve its target for the current financial year, it said.
Additional income tax revenues from the amnesty on undisclosed income, ending in September 2017, are also likely to boost government tax revenue (0.1pp of GDP), it said.
"We think that higher-than-expected tax revenues would offset any shortfall on the non-tax side, including telecom spectrum receipts and privatization proceeds," the Goldman Sachs report said.
It expects government capital spending to be slightly lower in current financial year compared to what was budgeted - 1.5 per cent of GDP as against 1.6 per cent budgeted.
Goldman Sachs expects tax revenue to grow by over 16 per cent in the financial year 2017-18 and support government finances.
The SBI research report expects a 13 per cent growth in tax revenues (gross) in the financial year 2017-18, driven primarily by robust growth in corporation tax (28.8 per cent).
Capital receipts, on the other hand may rise marginally due to low disinvestment target compared to the current fiscal over-optimistic target of Rs 56,500 crore (RS 565 billion), Ecowrap said.
"We expect the government would keep a realistic divestment target of Rs 45,000 crore (Rs 450 billion) for the financial year 2017-18," Ecowrap said.
On the expenditure side, the SBI research report said it doesn't perceive any significant jump and hopes a marginal increase in revenue expenditure at 13.1 per cent for the financial year 2017-18 compared to fiscal 2016-17 while a modest increase of 13.3 per cent in capital expenditure.
The removal of distinction between plan and non plan expenditure will help capital expenditure to grow at a better rate in the next fiscal 2017-18, Ecowrap said.
For the financial year 2017-18, it expects a net market borrowing at Rs 4.05 lakh crore with gross borrowing at Rs 5.80 lakh crore after adjusting for net redemptions of Rs 1.75 lakh crore (adjusted for debt switch and buy back).
The SBI research report believes there is a need to raise the income tax exemption limit to Rs 300,000 from Rs 250,000.
It also expects the government to increase the exemption limit of interest payments under housing loan to Rs 250,000 for existing home loan buyers also from the current level of Rs 200,000.
"The overall impact of such concessions will result in revenue foregone of around Rs 35,300 crore (Rs 353 billion)," Ecowrap said.
However, it is expecting a tax collection under Income declaration Scheme (IDS) to be around Rs 50,000 crore (Rs 500 billion) and cancelled liabilities from RBI to be around Rs 75,000 crore (Rs 750 billion), which will still give the government a sizeable revenue surplus even after such giveaways.
Illustration: Uttam Ghosh/Rediff.com
