India needs to maintain a tax buoyancy within the range of 1.2 to 1.5 in order to achieve a consistent economic growth rate of 6.5 to 7 per cent, according to a report released by EY on Wednesday. The report stressed that to meet these growth targets, the government must boost its revenue mobilisation efforts, particularly by raising the tax-to-GDP ratio. It estimates that the ratio, which is projected to be 12 per cent in FY26 (based on Budget Estimates), will need to increase to 14 per cent by FY31.
EY further highlights that India’s fiscal strategy should prioritise improving tax buoyancy, managing expenditures prudently, and continuing with structural reforms. These measures are crucial for ensuring long-term, sustainable economic growth.
Budget Strikes A Strategic Balance
EY India’s Chief Policy Advisor, D.K. Srivastava, stated that the FY26 budget strikes a strategic balance between fiscal consolidation and the need for growth.
“However, for India to achieve a medium-term growth trajectory of 6.5-7.0 per cent and realise its Viksit Bharat vision, it must ensure tax buoyancy remains in the 1.2-1.5 range. This would help create the necessary fiscal room to accelerate infrastructure expansion, enhance social sector spending, and maintain fiscal discipline,” Srivastava added.
The EY India Economy Watch report highlighted that over the past three years, gross tax revenue buoyancy has gradually moderated, declining from 1.4 in FY24 to 1.15 in FY25 (RE), with a projection of 1.07 for FY26 (BE). The report stated that maintaining tax buoyancy within the range of 1.2 to 1.5 could help the Government of India achieve a GDP growth rate of 6.5 to 7.0 per cent.
Indian Economy
The Indian economy is projected to grow at a rate of 6.3-6.8 per cent in the next fiscal year, with the current fiscal year estimated to see a GDP growth of 6.4 per cent.
The EY report further noted that over the past decade, the government has successfully reduced its fiscal deficit to GDP ratio from 4.1 per cent in FY15 to 3.4 per cent in FY19. However, this ratio is expected to rise to 4.4 per cent by FY26. The report stressed the need for a steady reduction in the fiscal deficit, aiming to bring it down to the FRBM-mandated level of 3 per cent.
