India’s revenue growth has come under pressure in the current financial year with tax sops, limiting the room for further fiscal policy support, analysts at Moody’s and Morgan Stanley said on Tuesday.
Martin Petch, vice president – senior credit officer (sovereign risk) at Moody’s Ratings, said at a webinar that revenue performance has been noticeably weak. “Revenue growth has been fairly weak, and there are probably some constraints in terms of fiscal consolidation … We have seen some tax cuts as well, and that is additionally weighing on revenue growth. There is probably less scope for fiscal policy support for the economy,” Petch said.
A Morgan Stanley report by chief India economist Upasana Chachra and economist Bani Gambhir echoed this concern, noting that government revenue growth in the first half of FY26 is significantly below expectations. “Government (total) revenue growth is lagging budget estimates by a wide margin as growth in H1FY26 stands at a meagre 4.5 per cent year on year (YoY), driven by broad-based moderation in tax collection while non-tax revenues have surprised positively (with record RBI dividend transfer of ₹2.68 lakh crore),” the economists said.
CGA data show that net tax revenue at end-September stood at over ₹12.29 lakh crore, lower than ₹12.65 lakh crore in the same period last year, and a 43.3 per cent achievement of the budget target, compared with 49 per cent in the corresponding period of FY25.
The FY26 union budget had increased income-tax exemption limits to ₹12 lakh to boost disposable income. In addition, GST rates were cut on around 375 items from September 22, making mass-consumption goods cheaper. These measures, while aimed at spurring consumption, have also weighed on revenue inflows.
As of September, total expenditure has reached ₹23 lakh crore, rising 9.1 per cent year-on-year, driven by accelerated capital spending. Morgan Stanley noted that expenditure has remained broadly in line with the budgeted share but there is a sharper tilt towards capex compared with the previous fiscal, when revenue expenditure had dominated.
The widening gap between revenue receipts and spending has sharpened concerns over meeting the fiscal deficit target of 4.4 per cent of GDP. With an anticipated pickup in tax collection in the October–December quarter, the economists estimate that tax revenues would need to grow by around 30.3 per cent in H2FY26 to meet budget projections—an ambitious target that signals the risk of slippage.
Monetary policy
Tight fiscal space is expected to shift attention back to monetary policy. With inflation on a downward trajectory, the Reserve Bank of India may consider additional rate cuts to support growth. RBI governor Sanjay Malhotra on Monday said that macroeconomic developments since the October review have preserved the room for policy easing.
Moody’s Petch said that easing inflation and monetary policy would help raise household purchasing power and support consumption. “We are looking at sustained, but easing economic growth over the next year,” he said, cautioning that persistently high tariffs could discourage investment.