The forthcoming Union Budget 2017-18 is likely to spell out measures to boost demand, with key spending themes likely to be 'rural spending' and 'greater capital spending', says a report.
"We think the government is likely to increase rural spending in FY18 through irrigation, low cost housing, and rural electrification to boost demand," Goldman Sachs said in a research note.
Prime Minister Narendra Modi in his year-end speech had made several announcements in support of the rural economy, including cheaper housing loans for low cost housing, interest rebates for farmers, and credit limit hikes and tax incentives for small business, it said.
According to the global financial services major, the government will have to tread very carefully between the need for stimulating demand in a weak economic environment after demonetisation and continuing on the path of fiscal consolidation.
"We expect the government to budget for a fiscal deficit target of 3.3 per cent of GDP, 30 bps higher than planned in the government's medium-term fiscal consolidation programme," it said.
Goldman Sachs expects government's capital spending to increase by 26 per cent. However, the government's spending priorities are likely to remain directed towards creating assets rather than giving subsidies.
On the tax revenue front, the government could provide some personal income tax relief to lower income brackets to compensate for the economic slowdown post demonetisation, and could also reduce corporate tax rates.
In terms of structural reforms, Goldman said it expects the road map for successful resolution of the demonetisation effort, the implementation of the GST reform, a medium-term fiscal consolidation path under the new fiscal policy framework and banking sector reform. "Our sector analysts expect the budget to be positive for most sectors, particularly infrastructure, capital goods and financials," it said.