Mumbai: The country's fiscal deficit for 2019-20 is expected to widen to 3.8 per cent and the upcoming Budget may set a target of 3.5 per cent for 2020-21, a report said on Friday.
The first full-year Budget of the current government, to be presented on February 1, will focus on reviving consumption demand through base-level income tax cuts, interest subvention for small and medium businesses and housing, Bank of America Securities said.
A correction in consumption demand is cited as a major reason for a dip in economic growth to a decadal low of 5 per cent.
As calls to revive the growth momentum increase, all eyes are set on Finance Minister Nirmala Sitharaman's strategy on fiscal deficit, as tightening of the gap may not help in the aim.
"We continue to believe that expansionary counter-cyclical fiscal policy is the need of the hour. We expect the finance minister to target higher fiscal deficits of 3.8 per cent of GDP (up from 3.3 per cent budgeted) in FY20 and 3.5 per cent in FY21," analysts at the American brokerage said.
It added that the sharp corporate tax cut announced last year will result in a recurring 0.8 per cent sacrifice for the next two years but added that the government has room as per the N K Singh committee report, and also pointed to the long-term fiscal deficit being at 4.5 per cent.
On the income tax front, there could be a cut at the lower-income group levels to push consumption, while small businesses may be offered a 2 per cent interest subvention on all their borrowings, it said.
The subvention is necessary to compensate the troubled segment from the 0.85 per cent increase in real lending rates since March, it said adding that the cost of the 2 per cent subvention will come at Rs 21,100 crore or 0.1 per cent of GDP.
There can also be an announcement of an interest subvention for homebuyers for the first year to rekindle the sagging realty demand, it said.
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