Foreign brokerage Goldman Sachs on Monday said it expects new Finance Minister Arun Jaitley to peg the fiscal deficit target for FY15 at 4.3 per cent, up from the 4.1 per cent stated by his predecessor P Chidambaram.
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However, the Wall Street brokerage noted that 4.3 per cent will be well below its earlier assessment of 4.8 per cent.
"We expect a fiscal deficit target of 4.3 per cent of GDP for FY15, slightly higher than the 4.1 per cent presented in the interim budget by the previous government, but lower than our previous estimate of 4.8 per cent," it said in a statement.
The previous government's expectation on tax revenue growth of 21 per cent was "too optimistic," it said.
It will take three years for the high fiscal deficit, which was one the reasons why foreign rating agencies threatened to downgrade the country's sovereign rating to junk, down to 3 per cent, the brokerage added.
In order to achieve the fiscal consolidation in the medium term, the government will return to fiscal rules, tax consumption instead of production, broaden the income tax base by creating a new Internal Revenue Service, and reduce fertiliser subsidies, it said.
Goldman said the government will focus on shifting spending from consumption to capital expenditure in its Budget.
"To boost growth, we think the government would need to focus more on capital spending, especially infrastructure, relative to subsidies. We therefore expect an increase in capex relative to the interim budget," it said, adding that fuel subsidy will come down to 0.6 per cent of GDP in FY15 from the 0.8 per cent in the year ago.