Finance minister Arun Jaitley will retain the fiscal gap at 3.5 percent in the budget, to help prop up sagging growth, a foreign brokerage said today.
"We expect finance minister Jaitley to target a fiscal deficit of 3.5 percent of GDP - same as in 2016-17-in 2016- 17," Bank of America Merill Lynch said in a note.
"Given that growth is stagnating at about 4.5 percent in the old GDP series, we have always believed that the Centre should relax fiscal deficit to combat a global recession that could prove to be longer than the Great Depression," it said, weeks ahead of the presentation of the Budget on February 1.
Under a roadmap to narrow the fiscal gap, the Centre was committed to reduce fiscal deficit to 3 percent in 2017- 18. However, in his last Budget, Jaitley had announced a review by a panel and suggest a range rather than a target.
The brokerage said it expects the committee headed by NK Singh to relax the next year's fiscal deficit target to 3 to 3.5 percent of GDP from 3 percent.
On the expenditure front, the focus will be on the seventh pay commission payouts to the government employees, state-run bank recapitalisation and rural spending, among others, it said.
It expects benefit of up to Rs 1 trillion which will come out of the income disclosure scheme, which will be useful to step up the bank recapitalisation targets without impacting the budgeted capital expenditure.
Further, a Rs 50,000-crore 'special dividend' to be expected from RBI because of demonetisation will be utilised for public expenditure in the run-up to the 2019 general elections, said the note.
The Wall Street brokerage flagged rising oil prices as a key risk to public finances, especially if the Centre holds the diesel prices at their peak.
The higher fiscal deficit number, coupled with an estimated Rs 2.2 trillion in buyback of government securities by RBI next fiscal year will lead to excess demand for government paper, it said.
Banks are likely to cut lending rates by up to 0.75 percent by September, it added.
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