Expecting the upcoming Budget to stay firm on the fiscal consolidation roadmap, brokerage firms believe that higher allocation can be made for capital expenditure amid a sharp decline in oil subsidy bill.
"We expect the government to continue on path of fiscal consolidation, budgeting for fiscal deficit of 3.6% of GDP in FY16, down from 4.2% in FY15 based on new GDP figures," Religare Capital Markets CEO Gautam Trivedi said..
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"However, unlike past years, revenue and expenditure targets need to be realistically framed. Also, a credible fiscal consolidation strategy over the medium-term is highly anticipated and required," he added.
In the past, fiscal math has often come under pressure due to assumption of a higher growth in tax collections.
In a pre-Budget note to investors, Morgan Stanley also said that it expects the government to stay committed to the path of fiscal consolidation.
"We believe that the key to track in the Budget is the government's commitment to the fiscal consolidation path," Morgan Stanley's Chetan Ahya said in a research note.
"We believe the government will maintain the fiscal deficit reduction roadmap as per medium-term fiscal policy and target to reduce fiscal deficit to 3.6%," he added.
Some economists have been advocating that the government should loosen the fiscal stance and move away from consolidation to reinvigorate growth through public spending.
However, such a move may not go down well with global rating agencies and RBI. The central bank has said in the past that one of the key factors for future rate cuts will be the government's commitment to reining in fiscal deficit.
Credit Suisse also said in a research note that the government is likely to stick to its fiscal deficit target of 3.6% of GDP for FY16, while also wanting to increase the allocation for capex to boost growth.
"We expect the government subsidy bill to fall by 25% from 2% of GDP in 2014-15 to 1.4% of GDP in 2015-16, providing additional fiscal room of 0.6% of GDP," a pre-Budget note from Credit Suisse said.
In its pre-Budget note, Religare said given the sharp drop in subsidies next year, the government's capital expenditure share is likely to go up to 13.2% in FY16 and boost growth amid weak private investments.
"We expect plan expenditure to grow at 18.3% in FY16, with non-plan expenditure growing at a much lower 3.8%, translating into overall expenditure growth of 8.3% to Rs 18.5 trillion," Religare's Trivedi said.
According to IDFC Securities, a mix of expenditure reforms, including lower subsidies and higher tax revenues, imply fiscal deficit will be 3.6% of GDP.
Further, the outlook for Plan expenditure is much better due to lower fuel subsidy outgo and higher excise revenues.
The increase in Plan expenditure is expected to be utilised on government schemes such as Clean India, Skill India, Digital India, housing for all and urbanisation (100 smart cities), roads and railways.