Government's fiscal deficit target for next fiscal could be changed to a 'range' and set at 3-3.5 per cent of the gross domestic product, rather than 3 per cent, says a Bank of America Merrill Lynch report.
According to the global financial services major, the institution of a committee to review the Fiscal Responsibility and Budget Management Act is a welcome move as it will allow 'cyclicity' in setting fiscal deficit targets.
The government on May 17 formed a five-member committee under former revenue secretary N K Singh to review the working of the 12-year old FRBM Act and examine the feasibility of a fiscal deficit range instead of a fixed target.
"Financial year 2017-18 fiscal deficit target may be set at 3-3.5 per cent of GDP than 3 per cent," BofA-ML said in a research note and added that "this fiscal expansion will offset credit/ growth slowdown".
According to the report, the just-constituted FRBM committee is expected to shift to a growth-oriented fiscal policy and this in turn would be a big positive for consumption-led growth.
"In our view, undue fiscal tightening is delaying recovery, at a time of global uncertainty.
“This supports our call of playing consumption over investment given that we expect 7th Pay Commission to add a consumption stimulus of 0.5 per cent of GDP for the next three years," it added.
The committee will submit its report to the government by October this year which implies that its recommendations could be implemented in the next budget.
The FRBM review committee will seek to settle the debate whether government can opt for higher fiscal deficit to boost economic growth.
In the 2016-17 budget, the government announced it was setting up a panel to change the medium-term fiscal deficit target from the current absolute number to a range, to ‘give necessary policy space to the government to deal with dynamic situations.’
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