Sluggish direct tax collection, likely shortfall in disinvestment proceeds and OROP scheme pay out will add to the government's fiscal burden but it will "adhere to" fiscal deficit target by reducing expenditure, says a Standard Chartered report.
It cautioned however that a decision to reduce capital expenditure more than recurrent expenditure could dampen the government's efforts to kick-start the investment cycle.
"A consumption boost resulting from pay revisions could support economic activity in the near term. However, lower government capex in an environment where private-sector investment is likely to remain weak could mean that such growth is unsustainable," the report said, adding that the recent improvement in investment has been primarily driven by government expenditure.
According to the global financial services major, the FY16 fiscal deficit target of 3.9 percent of the GDP is likely to come under pressure on sluggish direct tax collection, likely shortfall in disinvestment proceeds and the recent adoption of a new pension scheme for the armed forces.
"Faced with these additional costs, we believe the government will adhere to the fiscal deficit target of 3.9 percent of GDP by reducing expenditure," said the research note.
The target could be met either by significant rise in tax collections or by achieving aggressive divestment targets; "otherwise capital expenditure might have to bear the burden, with an adverse impact on medium-term growth", it said.
The report further noted that the next two years' budgets will face additional recurrent expenditure pressure on two counts: the ongoing impact of OROP; and the implementation of higher salaries and wages for public-sector employees.
"While the government can try to find ways to fund this, we believe these potential additional costs, along with fiscal deficit targets of 3.5 percent of GDP in FY17 and 3 percent in FY18, should be monitored closely," it added.