World Bank expects India's fiscal deficit to shrink further amid rising tax revenues

New Delhi: India's fiscal deficit is expected to shrink further, on the back of growing tax revenues, according to a World Bank report.

The report noted that this trend is anticipated to contribute to fiscal consolidation policies of the government.

"In India, fiscal deficits are expected to continue shrinking, largely on account of growing tax revenues," the report said.

While fiscal deficits across South Asia are predicted to remain tight, India stands out with its improving fiscal position. In contrast, fiscal deficits in other South Asian nations are projected to remain stable due to fiscal adjustments being offset by higher interest payments in Pakistan and infrastructure investments in Bangladesh.

The report noted that inflation in the region is forecast to moderate during the projection period, supported by stabilising exchange rates. Inflation is expected to remain within or below target ranges in countries like India, Nepal, and Sri Lanka.

India is also projected to retain its position as the fastest-growing economy among the world’s largest economies, with a GDP growth forecast of 6.7 per cent for FY2025-26 and FY2026-27.

The report highlighted sustained growth in India’s services sector and a strengthening of manufacturing activity, driven by government initiatives to enhance logistics infrastructure and simplify tax regulations.

Private consumption growth is expected to rise due to an improving labour market, increased credit availability, and easing inflation, while government consumption growth may remain restrained. Investment growth in India is anticipated to stay robust, underpinned by rising private investments, strong corporate balance sheets, and better financing conditions. These factors are expected to enhance the country’s economic resilience in the coming years.

The Indian government aims to bring down the fiscal deficit to 4.9 per cent of gross domestic product (GDP) in the current financial year from 5.6 per cent in 2023-24.

India's net direct tax collections, comprising corporate tax and personal income tax, shot up by a robust 15.4 per cent to Rs 12.1 lakh crore, from April 1 to November 10 during the current financial year, according to the latest figures released by the Central Board of Direct Taxes (CBDT).

Similarly, there has been a robust growth in GST collections on the back of rising economic activity.

The buoyancy in tax collections places more funds in the government's coffers to undertake investments in large infrastructure projects to spur economic growth and take up welfare schemes for the poor.

It also helps to keep the fiscal deficit in check and strengthens the macroeconomic fundamentals of the economy. A lower fiscal deficit means the government has to borrow less which leaves more money in the banking system for big companies to borrow and invest. This in turn leads to a higher economic growth rate and the creation of more jobs.

Besides, a low fiscal deficit keeps the inflation rate in check which strengthens the fundamentals of the economy and ensures growth with stability.

IANS