A recent World Bank report predicts that India will see a further reduction in its fiscal deficit, driven by increasing tax revenues, which is expected to support the government’s fiscal consolidation policies.
The report highlights that while fiscal deficits across South Asia are anticipated to remain tight, India is distinguishing itself with an improving fiscal position. In contrast, other South Asian countries like Pakistan and Bangladesh are expected to see stable deficits due to fiscal adjustments being offset by higher interest payments and infrastructure investments.
Inflation in the region is forecast to moderate, aided by stabilizing exchange rates, with countries such as India, Nepal, and Sri Lanka expected to keep inflation within or below target ranges.
India is projected to maintain its status as the fastest-growing economy among the world’s largest economies, with a GDP growth forecast of 6.7% for both FY2025-26 and FY2026-27. The report attributes this sustained growth to robust activity in India’s services sector and strengthened manufacturing, driven by government initiatives to enhance logistics infrastructure and simplify tax regulations.
Private consumption growth in India is anticipated to rise, bolstered by an improving labor market, increased credit availability, and easing inflation. Government consumption growth, however, may remain restrained. Investment growth is expected to stay strong, supported by rising private investments, solid corporate balance sheets, and favorable financing conditions, which are likely to enhance India’s economic resilience in the coming years.
The Indian government aims to reduce the fiscal deficit to 4.9% of GDP in the current financial year, down from 5.6% in 2023-24.
Net direct tax collections, including corporate and personal income taxes, have increased by 15.4% to Rs 12.1 lakh crore from April 1 to November 10, according to the Central Board of Direct Taxes (CBDT). Additionally, GST collections have seen robust growth due to rising economic activity.
The increase in tax collections provides the government with more funds to invest in large infrastructure projects and welfare schemes for the poor, helping to keep the fiscal deficit in check and strengthen the economy’s macroeconomic fundamentals. A lower fiscal deficit means the government needs to borrow less, leaving more money in the banking system for large companies to borrow and invest, leading to higher economic growth and job creation.
Moreover, a low fiscal deficit helps keep inflation in check, ensuring growth with stability.
