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Domestic demand to boost growth post income tax cuts in Budget 2025: S&P

S&P said India's union Budget is in line with its expectation of gradual fiscal consolidation and that undergirds the positive outlook on India's sovereign ratings 'BBB-'

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S&P said that revenue support will stem from continued large dividends from the central bank and potential capital underspending. | Representative Image

Press Trust of India New Delhi

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S&P Global Ratings on Tuesday said the Budget for 2025-26 will boost India's growth over the next few years via domestic demand through income tax cuts and the country will achieve the targeted 4.4 per cent fiscal deficit despite hiking I-T rebate.

S&P said India's union Budget is in line with its expectation of gradual fiscal consolidation and that undergirds the positive outlook on India's sovereign ratings BBB-'. The deficit targets are also consistent with S&P's projections. 

"We believe India will hit its deficit targets despite revenue loss from lifting the threshold for minimum taxable income and slower economic growth. Support will stem from continued large dividends from the central bank and potential capital underspending," S&P said in a statement.

 

The fiscal 2026 budget will boost growth over the next few years via domestic demand through tax cuts for households, it added.

"We anticipate consumer spending and public investments will maintain real GDP growth at 6.7 per cent in fiscal 2025 and 6.8 per cent in fiscal 2026. These growth rates continue to place India above sovereign peers at similar income levels and should continue to support fiscal revenue increase despite the income tax cuts," S&P said.

In its post-budget comments, Fitch Ratings said the government's clarification of medium-term debt reduction targets, if adhered to, could improve India's credit profile over time. 

Fitch rates India at THE lowest investment grade BBB-' with a stable outlook.

The government aims to maintain central government debt on a gradual downward trend, reaching close to 50 per cent of GDP by FY'31, roughly 7 percentage points lower than in FY'25.

The focus on a medium-term debt target should give greater flexibility to manage fiscal deficits, depending on economic conditions, Fitch said, adding the FY'26 Budget outlines credible path for medium-term debt reduction.

"We view the government's clarification of medium-term debt reduction targets as a positive development that, if adhered to, could improve the credit profile over time," Fitch Ratings said in a statement.

Fitch estimates real GDP to grow 6.4 per cent in current fiscal and 6.5 per cent in the next.

"Tax cuts may provide a modest consumption boost, and we expect government capex to remain relatively high, but overall, the fiscal deficit reduction is likely to be slightly contractionary," Fitch said.

The budget's income tax cuts will make it harder to raise the revenue/GDP ratio, which is also low, and it is unclear how sustainable the revenue support from central bank dividends will be.

The tax cuts could lift companies' growth expectations and investment intentions if these succeed in accelerating consumption.

"The policy approach of boosting investment through deregulation, as signalled in the budget, is also likely to be positive for the investment outlook, which is an important factor for India's medium-term growth potential. However, the scale of these effects remains unclear and will depend partly on the government's implementation of relevant policies," Fitch said.

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

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First Published: Feb 04 2025 | 7:18 PM IST

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