India's Fiscal Strategy Amidst Tax Cuts Wins S&P Approval

Despite tax cuts reducing government revenue by Rs 1 lakh crore, S&P Global Ratings believes India will meet fiscal targets. The government's disciplined fiscal management, including dividends from RBI and investments, ensures continued economic growth. Projected real GDP growth for 2025 and 2026 remains robust at 6.7% and 6.8%, respectively.

India's fiscal policy, despite recent tax slashes, continues to align with its consolidation goals, according to S&P Global Ratings. With Finance Minister Nirmala Sitharaman's announcement of zero tax on income up to Rs 12 lakh, the government anticipates a Rs 1 lakh crore revenue loss, yet remains confident in achieving deficit targets.

The Union Budget for fiscal 2025 forecasts a reduction in the fiscal deficit to 4.8% from 4.9% of GDP. S&P anticipates that the central and state efforts, augmented by RBI dividends and underspending, will stabilize India's fiscal health. The agency maintains a positive outlook on India's credit ratings owing to disciplined fiscal policy supporting growth.

Globally, as many nations wrestle with high deficits, India's approach stands out. While state deficits are expected to remain around 2.8%-2.7% of GDP, the central deficit's projected drop to 4.2% by 2028 promises a total general government deficit decline. The fiscal 2026 budget aims to drive growth via domestic demand and tax reductions.

S&P forecasts real GDP growth to stay at a robust 6.7% and 6.8% for fiscals 2025 and 2026, positioning India above its economic peers. The commitment to strong public investments and consumer spending is expected to counterbalance any negative impacts of tax reductions, ensuring continuation of the growth trajectory.

Investment allocation remains consistent at 3.1% of GDP, promoting infrastructure despite a slow in annual growth rate. Future strategies include focusing on reducing the debt-to-GDP ratio from fiscal 2027 onward, though high government interest costs pose a challenge. A sovereign rating upgrade hinges on reducing fiscal deficits below 7% of GDP sustainably.