Budget 2025 tax cuts to boost demand and consumption: Rating agencies

Fitch Ratings said that the budget will be broadly neutral for growth and continued to project real GDP expansion of 6.4 per cent in FY25 and 6.5 per cent in FY26

The Union Budget 2026 will boost growth over the next few years by increasing domestic demand through tax cuts for households, S&P Global ratings said on Tuesday.

 

S&P expects India will hit its deficit targets despite revenue loss from lifting the threshold for minimum taxable income and slower economic growth.

 

In its report on the Budget, Moody’s Ratings said the foregone revenue due to tax cuts would slow the pace of the country’s fiscal consolidation, even as total spending declines as a share of gross domestic product (GDP). It noted that tax measures will bolster middle-class spending power and consumption.

 

Fitch Ratings said the Budget would be broadly neutral for growth and continued to project real GDP expansion of 6.4 per cent in FY25 and 6.5 per cent in FY26. Tax cuts, Fitch Ratings said, may provide a modest consumption boost.

 

S&P said the slower growth in capital investments for FY26 does not suggest a deterioration in the quality of government spending. “India’s Union Budget remains in line with our expectation of gradual fiscal consolidation… We believe bottlenecks in executing infrastructure projects will ease as supply chain pressures lessen and general elections are over,” S&P Global Ratings said in a press statement.

 

S&P said the Budget allocation for capital expenditure is 3.1 per cent of GDP, unchanged from last financial year and is an increase of 10 per cent year-on-year in absolute terms.

 

The central government has lowered its fiscal deficit estimate for FY25 to 4.8 per cent of GDP from 4.9 per cent while budgeting a fiscal deficit of 4.4 per cent of GDP for FY26.

 

S&P has projected that, combined with central government deficits that may trend down to 4.2 per cent of GDP by FY28, the general government fiscal deficit could gradually decrease to 6.8 per cent of GDP from 7.8 per cent in FY25.

 

S&P also said the upgrade trigger for its sovereign ratings rests on a meaningful narrowing of India’s fiscal deficits, such that the net change in its general government debt falls below 7 per cent of GDP on a structural basis. “But a lower debt-to-GDP ratio for India would not necessarily lead to an improved debt burden score. This is due to the country’s very high ratio of government interest servicing to revenue,” S&P said.

 

Noting that fiscal deficit projections seemed realistic, Fitch Ratings said there was a risk of modest slippage in revenue collection targets amid a recent moderation in economic growth. “We expect government capex to remain relatively high, but overall, the fiscal deficit reduction is likely to be slightly contractionary,” Fitch Ratings said.

 

Highlighting that the Budget promotes private and state investments in infrastructure and energy transition, Moody's Ratings said the boost to spending due to rising disposable income would benefit makers of two-wheelers, passenger vehicles and white goods, and ride-hailing service providers.

 

“The latest budget signals a slowing pace of fiscal consolidation, as the government seeks to provide firmer support for economic growth amid a dampened macroeconomic backdrop compared to recent years. Still, we expect the government is within reach of its near-term deficit target of 4.5 per cent by FY26,” Moody’s Ratings said.