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Fiscal consolidation to slow as budget relies on tax measures to support economy: Moodys

Moody’s says India’s tax cuts will drive middle-class spending and corporate growth but may slow fiscal consolidation

Mumbai: Moody’s Ratings on Tuesday said that the income tax cuts announced in the Union Budget 2025 will boost middle-class spending and benefit corporates and the financial sector but warned that the lost revenue could slow fiscal consolidation despite a decline in spending as a share of GDP.
The announced tax measures account for the bulk of the government’s support for the economy. In particular, the government has effectively eliminated direct tax liabilities for workers earning less than Rs 12 lakh (about $13,860) per year to catalyze household consumption. The previous threshold was Rs 7 lakh (about $8,100). Although the government has estimated consequent foregone revenue at around Rs 1 lakh crore (0.3 per cent of GDP), it has continued to project a 14.4 per cent rise in income taxes, contributing to an 11 per cent rise in total tax receipts that is more rapid than the assumed 10 per cent rise in nominal GDP.
As a result, the materialization of downside risks to income tax collection, which the government has budgeted to account for about one-third of gross tax revenue, would belie the government’s view of revenue buoyancy that hinges on improved compliance and the return of robust economic growth, said Moody’s. Rising disposable incomes will boost spending by India's large and young population. Growing consumption will benefit makers of two-wheelers, passenger vehicles and white goods, and ride-hailing service providers. Initiatives aimed at agriculture and rural infrastructure will bolster consumer demand from rural India. Infrastructure development will support demand for building materials, cement and steel, said the global rating agency.
In the budget for the fiscal year ending March 2026 (fiscal 2025-26), the government is targeting a central government deficit of 4.4 per cent of GDP. This is 0.4 percentage point lower than the revised estimate of 4.8 per cent for fiscal 2024-25 and represents half the pace of the 0.8 percentage-point narrowing recorded in each of the past two fiscal years. Nevertheless, the budget puts the government within reach of its near-term deficit target of 4.5 per cent by fiscal 2025-26, which has guided fiscal policy since 2021.
"India's latest budget signals a slowing pace of fiscal consolidation, as the union government seeks to provide firmer support for economic growth amid a dampened macroeconomic backdrop compared to recent years. The proportion of spending allocated to debt servicing continues to increase," noted the rating agency.
( Source : Deccan Chronicle )
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