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India has to maintain tax buoyancy between 1.2 and 1.5 in order to fulfil its Viksit Bharat vision and reach a medium-term growth trajectory of 6.5-7.0, said an Ernst & Young (EY), a multinational professional services firm.By definition, tax buoyancy refers to the responsiveness of tax revenue to the growth of a country's economy. It measures how well tax revenue increases as the economy grows.
EY India's Economy Watch further adds that India's fiscal strategy must focus on enhancing tax buoyancy, prudent expenditure management, and structural reforms to ensure sustainable growth. The report says that maintaining the ideal balance between the demands of growth and budgetary consolidation will be essential in light of both domestic and international economic concerns. The Government will need to strengthen revenue mobilization, particularly by increasing the tax-to-GDP ratio from the estimated 12.0 per cent in FY26 (Budget Estimates) to 14.0 per cent by Financial Year (FY) 2031, it adds. This would create fiscal space for critical infrastructure development, social sector investments, and green growth initiatives, the report added. The FY26 budget aims to boost economic activity by increasing consumer spending while continuing strong infrastructure investments. By revising personal income tax rates and adjusting customs duties, the Government is putting more money in households' pockets--sacrificing about Rs 1 lakh crore in revenue to drive consumption. The Rs 1 lakh crore of additional disposable income through tax relief is expected to generate a multiplier effect, boosting aggregate demand, the report added. This approach results in a slight moderation of tax revenue growth, with the personal income tax buoyancy moving from 2.09 in FY25 (Revised Estimates) to 1.42 in FY26 (Budget Estimates). Over the past three years, the gross tax revenue buoyancy has gently moderated--from 1.4 in FY24 to 1.15 in FY25 (RE) and projected to be 1.07 in FY26 (BE). Furthermore, the report says that overall, the budget's strategy is set to create a dynamic economic environment that fosters sustainable long-term growth. The debt-to-GDP ratio remains an important factor to monitor, with projections indicating it may stay above the FRBMA target of 40 per cent well into the early 2040s. This could result in a high level of interest payments relative to Government revenue, as per the report. The EY Economy Watch also analyses how, over the past decade, the Government of India reduced its fiscal deficit to GDP ratio from 4.1 per cent in FY15 to 3.4 per cent in FY19, with the ratio expected to adjust to 4.4 per cent by FY26 (Budget Estimates). It needs to be reduced eventually to reach a level of 3 per cent, the report adds. The government has spent more on building infrastructure, while the gap between revenue and spending has improved. By FY26 (Budget Estimates), the debt-to-GDP ratio is expected to ease to 55.1 per cent and to about 50 per cent by FY31, the report added. The report says that the new job-linked incentives are set to boost growth and encourage more businesses to formalize. According to the report, these actions, which place greater emphasis on capital expenditures and revenue deficit reduction, indicate a robust, growth-oriented approach meant to guarantee long-term economic advancement. (ANI)
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