Datanomics: Lower tax buoyancy, not GDP, weighs on Centre's finances

Slower nominal GDP growth in FY26 may not hurt deficit math, but weak tax buoyancy and a slipping tax-to-GDP ratio signal rising stress on revenue collections

India’s nominal gross domestic product (GDP) growth in 2025-26 is officially estimated to be 2.1 percentage points lower than the Budget assumption of 10.1 per cent in 2025-26. However, this may not by itself  affect tax collections or the fiscal deficit, as nominal GDP in absolute terms is projected to be marginally higher at around ~357.13 trillion, against ~356.98 trillion estimated in the Budget. 

 

Fiscal deficit holds 

In the first half of FY26, the fiscal deficit narrowed to 3.3 per cent of GDP against full year projection of 4.4 per cent, with revenue expenditure compression doing most of the work 

 

Tax-to-GDP ratio slips despite favourable nominal GDP

  The Centre’s tax-to-GDP ratio, before devolution to states, declined to 10.8 per cent in the first half (H1) of FY26 from 11.5 per cent in H1FY25, pointing to weaker tax collections during the first half of the year   

 

Tax buoyancy signals stress 

Tax buoyancy slumped to 0.32 in the first half of FY26, down sharply from 1.3 in the corresponding period last year, which does not augur well for tax performance for the entire year