Finance Minister Arun Jaitley should provide more funds for development of infrastructure sector even at the cost of missing the fiscal deficit target of 3.5 percent in 2016-17, global consultancy firm EY said on Friday.
"The fiscal pressures next year are excessive arising out of Pay Commission recommendation. Given that, a marginal slippage of 0.3 percent in deficit target can be advocated, but the excess amount should be spent only on infrastructure," EY Chief Policy Advisor D K Srivastava said.
The fiscal consolidation roadmap laid out by Jaitley had estimated fiscal deficit to come down to 3.9 percent in current fiscal and further to 3.5 percent next fiscal. It was 4 percent last fiscal.
"The current year target of 3.9 percent will be met. But the way the global economy is performing, a minor slippage is permissible. A pre-decided target of 3.5 percent would put extreme pressure on the government and pay commission burden cannot be absorbed," Srivastava added.
The 7th Pay Commission in November recommended increase in remuneration of about one crore government employees and pensioners which is estimated to impose an additional burden of Rs 1.02 lakh crore in 2016-17. The new pay scales, subject to acceptance by government, will come into effect from January 1, 2016.
Releasing an analysis of the economic, tax and policy scenario in India, Srivastava told reporters that the Indian economy would face headwinds of negative growth in exports for the next 3-4 years and the government should create domestic demand by increasing capital expenditure.
"There is a global churning that is happening and exports growth will continue to be shut for the next 3-4 years. Its a medium term pressure that Indian export sector would face," he said, adding that the present focus should be on creating jobs within the country.
He added that even if the government deviates from the fiscal consolidation roadmap, if the growth stays in the projected level and food prices remain within control then the RBI could look at lowering rates in April.
The RBI has cut interest rates by 1.25 percent in 2015.
Saying that current slowdown provides opportunity to build infrastructure, Srivastava said a lot of sovereign wealth fund and pension funds want to invest in India's infrastructure.
As regards taxation measures expected in Budget, EY India National Tax Leader Sudhir Kapadia said the government could lower corporate tax rate for next fiscal by 1 percent.
Jaitley, in his last Budget, has already announced that the corporate tax rate would be brought down to 25 percent over four years from 30 percent at present.
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