Government has struck a balance between prioritising capital spending and being fiscally prudent and the ‘favourable expenditure mix’ should support 2017-18 growth, says a Goldman Sachs report.
According to the global financial services major, fiscal consolidation in 2017-18 is mainly driven by a reduction in expenditure, particularly current spending.
“Overall, we believe the government has maintained a balance between prioritising capital spending and being fiscally prudent,” Goldman Sachs said in a research note.
The government, in its annual Budget, called for a reduction in fiscal deficit to 3.2% of GDP in 2017-18, from a projected 3.5% in 2016-17 and an estimated 3.9% in 2015-16.
“The budgeted fiscal consolidation takes place via a decrease in total expenditure as a percentage of GDP, especially current expenditure, while capital spending remains high,” the report said.
It added that the revenue targets look “achievable”, with any downside risk to disinvestment target potentially offset by somewhat higher tax revenue growth.
The Economic Survey forecasts GDP growth at 6.75-7.50% in 2017-18.
“The budgeted primary deficit net of disinvestment proceeds is unchanged at 0.6% of GDP in 2017-18 versus 2016-17, suggesting limited negative impulse on growth from the proposed fiscal consolidation in 2017-18,” it said adding, the favourable expenditure mix should support 2017-18 growth.
The report further noted that though the recent fall in headline inflation along with fiscal consolidation, supports the possibility of a rate cut by the RBI at its next policy meeting, several other factors warrant a cautious approach.
“Our base case remains for a 25 bps rate cut by the RBI at its meeting on February 7-8, but we acknowledge that this will be a close call,” it added.
The central bank will hold its next monetary policy meet on February 8.