News Brief
India Must Sustain Tax Buoyancy Of 1.2 To 1.5 To Achieve 'Viksit Bharat' Vision, Says EY Report
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India must maintain a tax buoyancy between 1.2 and 1.5 to align with its Viksit Bharat vision and sustain a medium-term economic growth trajectory of 6.5–7.0 per cent, according to a report by Ernst & Young (EY), reported ANI.
Tax buoyancy, a measure of how responsive tax revenues are to growth in the economy, is critical to fiscal policy.
EY India's Economy Watch highlights the importance of improving tax buoyancy, judicious management of expenditure, and structural reforms to achieve long-term sustainable growth.
One key suggestion is that India's tax-to-GDP ratio needs to be raised from an estimated 12.0 per cent in FY26 (Budget Estimates) to 14.0 per cent by FY31.
Such a hike would give the government much-needed fiscal room for increasing infrastructure growth, social sector investments, and environmental growth activities.
The FY26 budget aims to stimulate economic growth by promoting consumption expenditure while retaining robust investment in infrastructure growth.
Through a reduction in personal income tax rates and modification of customs duty, the government is consciously putting additional disposable income in the pockets of households, at the cost of a revenue loss of around Rs 1 lakh crore.
The added liquidity is expected to have a multiplier effect, driving aggregate demand and thus further fueling economic growth.
Yet, the report mentions a slowing in tax collection growth, with personal income tax buoyancy set to reduce from 2.09 in FY25 (Revised Estimates) to 1.42 in FY26 (Budget Estimates).
A prime cause of worry continues to be the debt-to-GDP ratio, which is expected to continue over the FRBMA threshold of 40 per cent deep into the early 2040s.
The report cautions that this can lead to an increasing share of government revenue being directed towards paying interest.
Reviewing fiscal trends of the last ten years, the report says that India managed to reduce its fiscal deficit-GDP ratio from 4.1 per cent in FY15 to 3.4 per cent in FY19.
The figure is estimated to be 4.4 per cent by FY26 and then the aim is to reduce it to 3 per cent.
The government has given more emphasis to infrastructure expenditure, and as a result, there has been a better balance between expenditure and revenue generation.
The debt-to-GDP ratio will also be reducing to 55.1 per cent by FY26 and further to about 50 per cent by FY31, the report said.
On the other hand, the rollout of job-linked incentives will lead to business formalisation and creation of jobs, paving the way for a stronger economic framework.
The report concludes that through prioritisation of capital spending and lowering revenue deficits, the government is pursuing a bold, growth-driven path towards long-term economic strength and fiscal sustainability.
