Economic prospects look bright in near term: FinMin

New Delhi: Indian economy is showing "bright" near-term prospects, but reducing fiscal deficit to 3.5 percent of GDP in 2016-17 is a challenge because of additional liabilities on account of pay revision, the government said today.

The Medium Term Expenditure Framework Statement, tabled by Finance Minister Arun Jaitley in the Rajya Sabha, said major subsidies are expected to decline gradually from 1.5 percent of GDP in 2016-17, to 1.4 percent in 2017-18 and further to 1.3 percent in 2018-19.

The statement said macro economic stability has improved with the continuance of fiscal prudence and lower inflation particularly due to moderation in crude prices.

"In light of the encouraging performance of the economy during the previous financial year, marked by pick-up in economic growth, lower inflation, buoyant tax revenues, increasing foreign direct investment flows and the government's push to reforms in crucial areas including banking, infrastructure, power, taxation. The near term prospects for the economy look bright," it said.

It further said that there would be a challenge in reducing the fiscal deficit to 3.5 percent of GDP in current fiscal, from 3.9 percent in last fiscal, on account of huge burden of implementation of Pay commission recommendations.

"Keeping in view the challenge of reduction of the fiscal deficit by 0.4 percent of GDP in a difficult year in 2016-17 with substantial additional liabilities on pay revision, the Government is quite optimistic of fully achieving the fiscal deficit target of 3 percent by March 2018," the statement added.

Over one crore government employees and pensioners will get 2.5 times hike in basic pay and pensions under the 7th Pay Commission recommendations that will cost the exchequer annually Rs 1.02 lakh crore.

The fiscal deficit targets for 2017-18 and 2018-19 have accordingly been projected at 3 percent of GDP, the statement added.