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Moody's Ratings has flagged that recent tax cuts in India have weakened revenue growth, reducing fiscal space for policy support. Net tax revenue till September stood at INR 12.29 lakh crore, lower than last year's INR 12.65 lakh crore, with only 43.3% of the FY26 target achieved. The Union Budget raised the income tax rebate to INR 12 lakh and the government cut GST rates on 375 items, providing relief but straining revenues. Moody's noted that easing inflation, rate cuts and stronger household purchasing power will aid consumption, though economic growth may gradually soften. Domestic demand and infrastructure investment remain key drivers, even as high U.S. tariffs pose external risks.
Moody's Ratings has highlighted that recent tax cuts in India have slowed revenue growth, reducing room for fiscal policy measures to support the economy. Martin Petch, Vice President and Senior Credit Officer for Sovereign Risk at Moody's, said in a webinar that revenue growth has been weak, and tax relief measures are weighing further on government income, limiting fiscal space. Advertisement
Data from the Controller General of Accounts shows that net tax revenue till the end of September stood at over INR 12.29 lakh crore, down from INR 12.65 lakh crore during the same period last fiscal year. By September of FY26, only 43.3 per cent of the budgeted tax collection target was achieved, compared to 49 per cent in FY25.
The 2025-26 Union Budget raised the income tax rebate for individuals to INR 12 lakh from INR 7 lakh, providing about INR 1 lakh crore in relief to the middle class. In addition, effective September 22, the government reduced GST rates on roughly 375 items, lowering prices for mass-consumption goods to encourage spending.
India's fiscal consolidation roadmap aims to reduce the fiscal deficit to 4.4 per cent of GDP this year. Petch noted that easing inflation and accommodative monetary policy would help boost household purchasing power, further supporting consumption. He added that while India's economic growth is expected to remain sustained, it will gradually ease in the coming year.
The Reserve Bank of India had cut key policy rates by 50 basis points in June to a three-year low of 5.5 per cent. Consumer price inflation dropped to a record low of 0.25 per cent in October, influenced by GST cuts and a high inflation base last year.
According to Petch, domestic consumption and infrastructure investment are driving the Indian economy, helping mitigate the effects of high tariffs imposed by the United States, which currently levies a 50 per cent duty on Indian shipments. He cautioned that if these tariffs remain, foreign investments could be affected.
Moody's had recently projected India's economy to grow at 7 per cent in 2025 and 6.5 per cent in the following year, supported by domestic demand, export diversification, and a neutral-to-easy monetary policy stance.
Source PTI
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