Union Budget will boost growth over next few years via domestic demand through tax cuts for households: S&P Global

S&P Global said the fiscal 2026 budget will boost growth over the next few years via domestic demand through tax cuts for households

S&P Global Representational image | Reuters

Finance Minister Nirmala Sitharaman on February 1 announced the Union Budget that aimed to boost consumption by announcing income tax relief to the middle class, while at the same time it remained firmly on the path of fiscal consolidation. The income tax cuts should boost growth says ratings agency S&P Global, and it believes the fiscal targets will also be met.

"India's Union budget remains in line with our expectation of gradual fiscal consolidation. This undergirds our positive outlook on the sovereign credit ratings," said S&P Global Ratings.

In the Union Budget, the finance minister announced salaried people earning an income up to Rs 12 lakh will pay zero income tax, while tax slabs in the new regime were also tweaked in a way that those earning income between Rs 12 and 24 lakh would pay a lower income tax. The highest 30 per cent tax bracket would now be applicable to only those earning an income of over Rs 24 lakh per year, versus above Rs 15 lakh earlier.

The fiscal 2026 budget will boost growth over the next few years via domestic demand through tax cuts for households, pointed out S&P Global.

"Economic expansion in India is normalising toward a more sustainable level after real growth averaged 8.3 per cent over fiscal 2022-2024 post-pandemic. We anticipate consumer spending and public investments will maintain real GDP growth at 6.7 per cent in fiscal 2025 and 6.8 per cent in fiscal 2026. These 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," it said.

In the Budget, the fiscal deficit target for the current financial year ending March 2025 was lowered to 4.8 per cent of GDP from 4.9 per cent and it is forecast to further decline to 4.4 per cent in the year ending March 2026.

S&P believes the government will meet its fiscal deficit targets, supported by continued large dividends from the central bank and potential underspending.

But while the Union government is focused on lowering its fiscal deficit, state governments too persistently run a high deficit. S&P expects aggregate state shortfalls could be 2.8-2.7 per cent of GDP over the next three years. Combined with central government deficit that may trend down to 4.2 per cent of GDP by 2027-28, the general government fiscal deficit could gradually come down to 6.8 per cent from 7.8 per cent in the current financial year, according to the ratings agency.

"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 per cent of GDP on a structural basis," S&P said.

In the budget, allocation to capital expenditure for 2025-26 financial year at Rs 11.2 lakh crore was around 10 per cent higher than the revised estimates for the current financial year. However, it was lower than the average 23 per cent annually in the past three years and as a share of GDP, central government capex remained unchanged from a year ago at 3.1 per cent, noted S&P.

Shares of many engineering and capital goods companies that had been under severe pressure in the last two trading sessions over the lower capex spending worries, rebounded on Tuesday.

"The slower growth in capital investments for fiscal 2026 does not suggest a deterioration in the quality of government spending," said S&P. It expects bottlenecks in executing infrastructure projects will ease as supply chain pressures lessen and general elections are over.

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