Mumbai: Government is likely to meet its fiscal deficit target this year despite risks of shortfall in tax collection and disinvestment proceeds, as it may go for a small reduction in public spending, says a report.


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The Finance Ministry has been sensitising markets that tax collections could fall short by Rs 50,000 crore and divestment by Rs 30,000 crore.


The government had set an ambitious Rs 69,500 crore divestment target but so far could realise only one-tenth of the same.


This poses a risk of about 0.6 percent of GDP to Finance Minister Arun Jaitley's 3.9 percent fiscal deficit target for fiscal 2015-16, Bank of America Merrill Lynch (BofA-ML) said in a report.


"We expect the Finance Minister to meet his 3.9 percent of GDP fiscal deficit target in FY16 in our base case. It's true that the ministry has acknowledged that there is a risk of Rs 50,000 crore to tax collections. This should be made up by a cut in capital expenditure, if needed," the report said.


The cut in expenditure is unlikely to impact government borrowings, the report added.


"The government's surpluses with the RBI and the rising small savings could fund a higher fiscal deficit without expanding issuance," the report said.


The Centre has been running large surpluses of Rs 1,57,300 crore in March 2015 and Rs 1,28,400 crore in March 2014 with the RBI.


Drawdown of these monies to support cyclical recovery is, by far, the preferred option given the backdrop of weakening global growth, it said.


The report said if flows from overseas investors stall, resulting in a shortfall in divestment, the RBI may go for open market operations (OMOs) of USD 8-10 billion to provide liquidity.


"The RBI will likely need OMOs worth USD 8-10 billion to supply permanent liquidity of about USD 30 billion by March if the foreign inflows come down. This should also limit the impact of fiscal slippages on the government bond market," the report added.


It further said the government will likely retain the current fiscal deficit target of 3.9 percent of GDP -- higher than its 3.5 percent pre-commitment -- in 2016-17 as well to fund the implementation of the Seventh Pay Commission and 'one rank, one pension' (OROP) scheme.


The report expects net borrowing to be at Rs 5.5 trillion for FY17.