Fiscal strain: Moody’s says tax cuts slow govt revenue; will it limit support for the economy?

India’s fiscal space is tightening as recent tax cuts weigh on revenue growth, leaving the government with less room to support the economy through policy measures, Moody’s Ratings said on Tuesday, according to PTI. The global agency flagged that lower collections in the current financial year have added pressure on the fiscal consolidation path.Speaking at a webinar, Martin Petch, Vice President – Senior Credit Officer, Sovereign Risk at Moody’s Ratings, said, “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.”According to Controller General of Accounts (CGA) data, net tax revenue stood at over Rs 12.29 lakh crore at the end of September, compared with Rs 12.65 lakh crore in the same period last year. Only 43.3 per cent of the full-year tax collection target has been achieved so far, versus 49 per cent in the corresponding period of FY25.The Union Budget for FY26 raised the income-tax rebate threshold to Rs 12 lakh from Rs 7 lakh, providing Rs 1 lakh crore in relief to the middle class. GST rates on around 375 items were also cut from September 22, making mass-consumption goods cheaper in a bid to spur demand.Petch said easing inflation and monetary policy would help restore household purchasing power and support consumption. “We are looking at sustained, but easing economic growth over the next year,” he added.Inflation has dropped sharply, with consumer prices falling to a record low of 0.25 per cent in October as the GST cuts kicked in and last year’s high base softened the numbers. In June, the RBI cut key policy rates by 50 basis points to 5.5 per cent – the lowest in three years.Petch noted that domestic consumption and infrastructure spending remain the main growth engines for the Indian economy and could help offset the impact of the US’s higher tariffs. The Trump administration has imposed a 50 per cent duty on Indian shipments to the US.Moody’s last week projected India’s GDP to grow 7 per cent in 2025 and 6.5 per cent in 2026, supported by domestic demand, export diversification and a neutral-to-easy monetary policy environment.