Leading American brokerage Goldman Sachs has said the forthcoming Union Budget will be keenly watched as a "test of the government's commitment" to fiscal responsibility.
"The budget will be keenly watched as a test of the government's commitment to fiscal responsibility, whether there is a credible plan for reducing the fiscal deficit and whether populist measures can be avoided before the 2014 general elections," the Wall Street firm said in a note.
From a stock market perspective, the report also says the budget could be positive for banks, capital goods and logistics, but negative for consumer goods.
It further said that while Finance Minister P Chidambaram is likely to announce a deficit target of 4.8 per cent for FY14, the credibility on how to achieve this target will be the key.
Chidambaram has already cut down on planned expenditure by up to 10 per cent and has publicly stated that he would bring fiscal deficit down to 5.3 per cent this financial year.
"We think the budget will focus on expenditure cuts, which have a better chance of succeeding, rather than optimistic revenue increases.
"In terms of financing the deficit, our analysis of demand for government bonds suggests that the Reserve Bank is likely to do fewer OMOs compared to the previous years, due to increasing demand from banks and mutual funds," Goldman Sachs India chief economist Tushar Poddar said in the report.
Explaining their rationale, the report prepared by Poddar said, the very high fiscal deficit is endangering macro stability and contributing in part to a high current account deficit. To ensure a stable macro environment, reducing the fiscal deficit is necessary, albeit not sufficient.