india-needs-stronger-tax-growth-to-sustain-economy

India must maintain tax buoyancy between 1.2 and 1.5 to achieve a sustainable growth rate of 6.5 to 7 per cent, according to a report by EY released on Wednesday.

 

The report highlighted the need for the government to enhance revenue mobilisation, particularly by raising the tax-to-GDP ratio from an estimated 12 per cent in the 2025-26 financial year to 14 per cent by 2030-31.

 

The analysis suggested that fiscal policy should focus on increasing tax revenues, managing expenditure efficiently, and continuing structural reforms to ensure long-term economic stability.

 

EY India Chief Policy Adviser D K Srivastava noted that the 2025-26 budget maintains a careful balance between fiscal consolidation and growth objectives.

 

He stressed that achieving a medium-term growth trajectory of 6.5 to 7 per cent, in line with India's "Viksit Bharat" vision, would require maintaining tax buoyancy within the recommended range.

 

“This would create the fiscal space needed to accelerate infrastructure expansion, increase social sector spending, and uphold fiscal discipline,” Srivastava said.

 

The EY India Economy Watch report observed that over the past three years, tax revenue buoyancy has gradually declined.

 

It stood at 1.4 in the 2023-24 financial year but fell to 1.15 in the revised estimates for 2024-25 and is projected to drop further to 1.07 in the 2025-26 budget estimates.

 

The report emphasised that stabilising buoyancy between 1.2 and 1.5 could help India sustain GDP growth in the 6.5 to 7 per cent range.

 

For the upcoming financial year, India’s economy is projected to expand between 6.3 and 6.8 per cent, while GDP growth for the current fiscal is estimated at 6.4 per cent.

 

The report also highlighted the country’s fiscal deficit trends over the past decade. The government reduced the fiscal deficit-to-GDP ratio from 4.1 per cent in the 2014-15 financial year to 3.4 per cent in 2018-19.

 

However, the ratio is expected to stand at 4.4 per cent in 2025-26. EY recommended that the deficit be gradually reduced to the Fiscal Responsibility and Budget Management (FRBM) target of 3 per cent.