Despite income tax cuts, India on track for fiscal consolidation: S&P Global Ratings

New Delhi [India], February 4 : India's fiscal consolidation efforts remain on course despite recent income tax cuts, according to S&P Global Ratings.
Finance minister Nirmala Sitharaman on Saturday announced zero tax on income of up to Rs 12 lakh. The union government will forego a revenue of Rs 1 lakh cr because of this cut.
The rating agency anticipates that India will meet its deficit targets despite revenue losses from raising the minimum taxable income threshold and slower economic growth.
The Union Budget for fiscal 2025 has projected a lower fiscal deficit of 4.8 per cent of GDP, down from the earlier estimate of 4.9 per cent for the current fiscal. For FY26, the government has set a target of 4.4 per cent, aligning with S&P's expectations.
S&P noted that India's strategy for managing fiscal health includes large dividends from the Reserve Bank of India (RBI) and potential capital underspending.
The global rating agency reaffirmed its positive outlook on India's sovereign credit ratings, highlighting that the government has maintained a disciplined fiscal approach while supporting economic growth.
While many countries globally are struggling with fiscal consolidation, India's approach remains unique due to the high deficits of its state governments.
S&P projects that state government deficits will hover between 2.8 per cent-2.7 per cent of GDP over the next three years. However, with the central government's fiscal deficit gradually declining to 4.2 per cent by fiscal 2028, the overall general government fiscal deficit could fall to 6.8 per cent of GDP from 7.8 per cent in fiscal 2025.
The fiscal 2026 budget is expected to stimulate economic growth through domestic demand and household tax cuts.
S&P highlighted that India remains committed to investment-led growth and agriculture sector reforms, even as economic expansion normalizes following the post-pandemic boom.
The rating agency projects India's real GDP growth at 6.7 per cent in fiscal 2025 and 6.8 per cent in fiscal 2026, placing it ahead of sovereign peers with similar income levels.
S&P believes that strong consumer spending and continued public investments will help maintain growth momentum, offsetting concerns over income tax reductions.
The government's allocation for capital expenditure remains steady at 3.1 per cent of GDP, unchanged from fiscal 2024. In absolute terms, capital investment has grown 10 per cent year-on-year, although this is lower than the 23 per cent annual average growth over the past three years.
S&P anticipates that the execution of infrastructure projects will improve as supply chain pressures ease and the impact of general elections subsides.
From fiscal 2027 onward, the Indian government plans to shift its fiscal performance focus from deficit targets to the debt-to-GDP ratio. S&P stated that while the implications of this shift remain uncertain, an improvement in India's fiscal flexibility could enhance its sovereign rating.
However, the agency cautioned that India's high government interest servicing costs remain a challenge in reducing the overall debt burden.
An upgrade in India's sovereign ratings would depend on a significant reduction in fiscal deficits, ensuring that the net change in general government debt falls below 7 per cent of GDP on a structural basis.