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Budget 2025-26 will boost India’s growth over the next few years, thanks to domestic demand driven by income tax cuts for households, S&P Global Ratings said on Tuesday (February 4, 2025), even as it pared the 2024-25 growth projection to 6.7% from an earlier predicted 6.8%, and flagged a lack of clarity on the fiscal consolidation path forward.

The rating major mildly raised its growth forecast for 2025-26 to 6.8% from 6.7% projected last November. This is at the higher end of the 6.3%-6.8% real GDP growth projected for 2025-26 in this year’s Economic Survey.

India is expected to meet its fiscal deficit targets of 4.8% of GDP for this year and 4.4% of GDP in 2025-26, despite revenue losses from income tax breaks and slower economic growth, the rating firm said. These revenue losses may be offset by “support” stemming from “continued large dividends from the central bank and potential capital underspending”, the agency remarked, adding that the expected growth rates “continue to place India above sovereign peers at similar income levels and should continue to support fiscal revenue increase despite the income tax cuts”.

The Budget’s math remains in line with the firm’s expectation of gradual fiscal consolidation and “undergirds our positive outlook on the sovereign credit ratings”, it said in a bulletin titled ‘India remains on fiscal consolidation course despite Income tax cuts’.

But the agency is not so sanguine about the government’s move to a new fiscal anchor of debt to GDP ratio, instead of the fiscal deficit, from 2026-27. Over the five years from 2026-27 to 2030-31, the government has set a goal to achieve a debt to GDP ratio of 50% (plus or minus 1%). In 2025-26, this ratio is estimated to be around 56.1% of GDP, as per a fiscal policy statement mandated by the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 tabled by Finance Minister Nirmala Sitharaman in Parliament. .

“How the change will affect India’s fiscal consolidation path is still unclear. The upgrade trigger for our sovereign ratings rests on a meaningful narrowing of India’s fiscal deficits, such that the net change in its general government debt falls below 7% of GDP on a structural basis,” it averred.

“This may improve the fiscal flexibility and performance score. But a lower debt-to-GDP ratio for India would not necessarily lead to an improved debt burden score. This is due to the country’s very high ratio of government interest servicing to revenue,” S&P Global pointed out.

In the fiscal policy statement, the Minister had said the debt to GDP approach “would provide requisite operational flexibility to the Government to respond to unforeseen developments”.

“At the same time, it is expected to put Central Government debt on sustainable trajectory in a transparent manner,” she emphasised.

S&P Global also reckoned that the slower growth in capital investments next year “does not suggest a deterioration in the quality of government spending”.

At 3.1% of GDP in 2025-26, the capital expenditure allocation in the Budget is unchanged from 2024-25, although the 10% increase in absolute terms is lower than the 23% average growth in the past three years. “We believe bottlenecks in executing infrastructure projects will ease as supply chain pressures lessen and general elections are over,” the firm said.