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Economy: Amid strong tax revenues, India’s fiscal deficit to shrink further, says WB

Economy: Amid strong tax revenues, India’s fiscal deficit to shrink further, says WB

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Virendra Pandit

 

New Delhi: As Finance Minister Nirmala Sitharaman gives the finishing touches to the Union Budget for the next financial year (2025-26), to be tabled on February 1 in the Lok Sabha, the World Bank has said India’s fiscal deficit is expected to shrink further because of growing tax revenues, the media reported on Friday.

India’s fiscal deficit is likely pegged at 4.9 percent of the GDP for FY26, down from 5.6 percent in FY25.

On the economic growth front, the WB said, India might maintain its position as the fastest-growing economy among the world’s largest economies and projected its GDP growth at 6.7 percent for both FY26 and FY27.

India’s services sector is set to witness sustained growth. At the same time, manufacturing activity is expected to strengthen, aided by government initiatives to enhance logistics infrastructure and streamline tax reforms, it said in its latest report.

This trend is likely to contribute to government fiscal consolidation policies. It said, “In India, fiscal deficits are expected to continue shrinking, largely due to growing tax revenues.”

The World Bank noted that while fiscal deficits in most countries in South Asia may remain generally tight, India stands out with its improving fiscal position.

Region-wide fiscal deficits, excluding India, are projected to remain stable, because of fiscal adjustments being offset by increased interest payments in Pakistan and infrastructure investments in Bangladesh.

Despite the improving fiscal scenario, the WB report cautioned the government that the debt-to-GDP ratios in South Asia will remain high, although they are expected to decline gradually. Debt-servicing costs would remain high in many countries because of persistently high borrowing costs.

“While government debt-to-GDP ratios in the region are expected to decline gradually, they will remain elevated.”

Inflation in South Asia is forecasted to moderate further during the projection period, supported by stabilizing exchange rates.

The report underlined that inflation might stay within or below target ranges in most countries, including India, Nepal, and Sri Lanka.

The labor market’s improvement, expanding credit availability, and easing inflation are likely to boost private consumption growth. However, government consumption growth might remain restrained.

“The services sector is expected to enjoy sustained expansion, and manufacturing activity is anticipated to strengthen, supported by government initiatives to enhance logistics infrastructure and improve the business environment through tax reforms.”

Investment growth in India would remain steady, driven by rising private investment, healthy corporate balance sheets, and improved financing conditions, which may all further reinforce the country’s economic resilience in the coming years.

 

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