Government may deviate from the fiscal consolidation roadmap and up its deficit target for 2016-17 to 3.9 per cent of GDP to push rural demand and pay higher wages to civil servants, Goldman Sachs said today.
"We expect the government to pause on fiscal consolidation and keep the central fiscal deficit unchanged at 3.9 per cent of GDP in FY'17. We expect civil service wage increases to be implemented only partially, food subsidy allocations to rise, and capex to increase 25 per cent year- on-year," Goldman Sachs Economics Research said in a report.
Finance Minister Arun Jaitley will present the Budget 2016-17 on February 29 outlining the deficit projection for the fiscal. In the last budget, he had delayed the consolidation roadmap by a year for bringing down the deficit to 3.5 per cent in 2016-17 and to 3 per cent in 2017-18.
As per the roadmap, deficit is to be brought down to 3.5 per cent of GDP in 2016-17, from 3.9 per cent in 2015-16.
Goldman Sachs said the key spending themes in the budget would be civil servants' wage increase, rural spending and greater capital spending.
On the reforms front, the global financial services major said it expects that in the upcoming Budget session the legislators would pass a new bankruptcy code, and approve formation of a interest rate setting monetary policy committee.
"The GST bill would likely receive a push by the government, and we think there is a slightly greater than even chance it passes towards the end of the Parliamentary session due to potential changes in the composition of the Upper House," Goldman Sachs said.
The bill on GST, which will usher in a single indirect tax rate through out the country, has been long pending in the Rajya Sabha where the ruling NDA does not enjoy majority.
The Budget Session of Parliament begins on February 23.
Pursuant to Pay Commission recommendations, the government will have to increase wages of civil servants which would cost about Rs 1.02 lakh crore to the exchequer.
"Net of income taxes, we estimate that the increase in the fiscal deficit due to the wage increase may be around 0.5 per cent of GDP. In our base case, we assume the central government will increase wages but delay the increase in allowances," Goldman Sachs said.
It said however that a pause in the fiscal consolidation path creates risks to medium-term debt dynamics.