Tax cuts dent revenue growth, less scope for fiscal policy support to economy: Moody’s

Moody’s Ratings on Tuesday said tax cuts in the current fiscal has dented India’s revenue growth, leaving less scope for fiscal policy support for the economy. 

“Revenue growth has been fairly weak and there are probably some constraints in terms of fiscal consolidation ... 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,” Moody’s Ratings Vice President - Senior Credit Officer, Sovereign Risk Martin Petch said at a webinar.   According to CGA data, net tax revenue at the end of September was over Rs12.29 lakh crore, down from Rs12.65 lakh crore in the corresponding period of last fiscal.  As per the data, only 43.3 per cent of the budget estimates of tax collection was achieved till September of FY26, as against 49 per cent achieved in the corresponding period of FY25. 

The government in Budget for 2025-26 fiscal year has hiked I-T rebate to Rs12 lakh, from Rs7 lakh, which gave tax relief of Rs1 lakh crore to the middle class.

Further, effective September 22 the GST rates on about 375 items were slashed making mass consumption items cheaper. These measures were aimed at boosting consumption. 

As per the fiscal consolidation roadmap, India targets to bring down the fiscal deficit to 4.4 per cent of GDP in current fiscal.

Petch further said that easing of inflation and monetary policy will help increase household purchasing power and further boost consumption.

“We are looking at sustained, but easing economic growth over the next year,” Petch said. 

The RBI in June had cut key policy rates by 50 basis points to a 3-year low of 5.5 per cent. Consumer price inflation has fallen to a record low of 0.25 per cent in October as the GST rate cut took effect along with a high inflation base of last year.  Petch said that domestic consumption and infrastructure spending is driving the Indian economy and will help offset the impact of high tariffs imposed by the US. However, if tariffs remain high, further investments may be deterred, he added.  Trump administration has levied a 50 per cent duty on Indian shipments to the United States.

Moody’s Ratings had last week projected India’s economy to grow at 7 per cent in 2025 and 6.5 per cent in the next year, supported by domestic and export diversification, amid a neutral-to-easy monetary policy stance.