The ensuing budget is likely to fix a fiscal deficit target of 3.5 per cent of GDP in 2017-18, relaxing the 3 per cent target earlier in order to support growth, says a report.
According to global financial services major Bank of America Merrill Lynch, (BofA-ML) the financial year 2017-18 fiscal deficit target is likely to be the same as this fiscal.
"We expect Finance Minister Arun Jaitley to target a fiscal deficit of 3.5 per cent of GDP - same as 2016-17 - in 2017-18 in his February 1 Budget, easing the 3 per cent target," BofA-ML said in a research note.
Fiscal deficit, the gap between expenditure and revenue for the entire fiscal, has been pegged at Rs 5.33 lakh crore, or 3.5 per cent of GDP, in 2016-17.
According to official figures, fiscal deficit touched Rs 4.58 lakh crore, or 85.8 per cent of the budget estimate for the whole financial year, at the end of April-November.
It further noted that given that growth is stagnating at about 4.5 per cent in the old GDP series, a relaxation in the fiscal deficit target is likely.
"We have always believed that the Center should relax the fiscal deficit to combat a global recession that is proving to be longer than the Great Depression," BofA-ML added.
Moreover, the committee to review Fiscal Responsibility and Budget Management Act is expected to build in cyclicity in setting fiscal deficit forecasts by switching to a target range of 3-3.5 per cent of GDP in 2017-18 from a point target 3 per cent, it added.
The report further noted that the Ministry of Finance should net about Rs 1,500 billion from demonetisation.
"After paying for the 7th Pay Commission outgo, PSU bank recapitalisation and a step up in social schemes, the FM will be barely able to fund the budgeted level of public capital expenditure," the report added.
India remained the fastest growing major economy with its GDP accelerating to 7.3 per cent in the July-September quarter, pushed mainly by farm output, although the momentum is expected to be hit in the coming months by the impact of demonetisation.