Global ratings agency Moody's has issued a cautionary note on India's economic management, stating that the government's fiscal space is tightening due to recent tax cuts impacting revenue growth. This development could limit New Delhi's capacity to deploy policy measures for supporting the economy, according to a PTI report.
Revenue Growth Weakness and Fiscal Constraints
Martin Petch, Vice President and Senior Credit Officer for Sovereign Risk at Moody's Ratings, highlighted these concerns during a webinar on Tuesday. "Revenue growth has been fairly weak and there are probably some constraints in terms of fiscal consolidation," Petch stated. He specifically pointed to tax reductions as a contributing factor, noting, "We have seen some tax cuts as well, and that is additionally weighing on revenue growth. There is probably less scope for fiscal policy support for the economy."
Official data from the Controller General of Accounts (CGA) substantiates these concerns. By the end of September, net tax revenue stood at just over Rs 12.29 lakh crore, falling short of the Rs 12.65 lakh crore collected in the same period last year. The data reveals a more worrying trend: only 43.3% of the full-year tax collection target has been achieved so far, compared to 49% during the corresponding period of the previous financial year.
Significant Tax Relief Measures Implemented
The Union Budget for FY26 introduced substantial tax relief, raising the income-tax rebate threshold from Rs 7 lakh to Rs 12 lakh. This move provided an estimated Rs 1 lakh crore in relief to the middle class. In a parallel development aimed at stimulating consumption, the government slashed GST rates on approximately 375 items effective September 22, making a wide range of mass-consumption goods more affordable for consumers.
Economic Outlook and Mitigating Factors
Despite the fiscal headwinds, Petch identified positive factors that could support economic momentum. He suggested that easing inflation and a accommodative monetary policy would help restore household purchasing power and bolster consumption. "We are looking at sustained, but easing economic growth over the next year," he added.
The Indian economy has indeed witnessed a sharp decline in inflation, with consumer prices hitting a record low of 0.25% in October. This decline was driven by the recent GST cuts and a high base effect from the previous year. Supporting this trend, the Reserve Bank of India (RBI) cut key policy rates by 50 basis points to 5.5% in June, marking the lowest rate in three years.
Petch emphasized that domestic consumption and infrastructure spending continue to be the primary engines for India's economic growth. These domestic drivers are expected to help counterbalance the impact of external trade challenges, such as the 50% duty on Indian shipments imposed by the Trump administration in the US.
Reflecting this balanced view, Moody's last week projected India's GDP to grow by 7% in 2025 and 6.5% in 2026. The agency expects this growth to be underpinned by robust domestic demand, ongoing export diversification, and a neutral-to-easy monetary policy environment.
