MUMBAI: India must maintain tax buoyancy in the range of 1.2-1.5 to achieve a GDP growth rate of 6.5-7 per cent, according to an EY report released on Wednesday.
The report suggests that the government should focus on strengthening revenue mobilisation, particularly by increasing the tax-to-GDP ratio from an estimated 12 per cent in the financial year 2026 (as per Budget Estimates) to 14 per cent by the financial year 2031.
Tax buoyancy measures how responsive tax revenue is to changes in GDP. A tax buoyancy of 1.2-1.5 means that for every one per cent increase in GDP, tax revenue should grow by 1.2-1.5 per cent. This ensures that as the economy expands, the government’s tax collections increase at a faster rate, providing more fiscal space for public spending.
Need for higher tax buoyancy
EY India Chief Policy Advisor D K Srivastava highlighted that the financial year 2026 budget balances fiscal consolidation with growth imperatives. However, for India to sustain its medium-term growth trajectory and realise its Viksit Bharat vision, it must maintain tax buoyancy within the 1.2-1.5 range.
“This would create the necessary fiscal room to accelerate infrastructure expansion, enhance social sector spending, and maintain fiscal discipline,” Srivastava said.
Over the past three years, India’s gross tax revenue buoyancy has moderated; It stood at 1.4 in the financial year 2024.It is estimated to decline to 1.15 in the financial year 2025 (Revised Estimates) and projected to further drop to 1.07 in the financial year 2026 (Budget Estimates).
If the government can maintain tax buoyancy in the range of 1.2-1.5, it could help achieve GDP growth of 6.5-7.0 per cent, EY stated.
Fiscal deficit trends
India’s economy is projected to grow between 6.3-6.8 per cent in the next fiscal year, while the GDP growth for the current financial year is estimated at 6.4 per cent.
The report noted that the government has worked to reduce its fiscal deficit to GDP ratio from 4.1 per cent in the financial year 2015 to 3.4 per cent in the financial year 2019. The ratio is expected to adjust to 4.4 per cent by the financial year 2026, but further consolidation will be needed to bring it down to the Fiscal Responsibility and Budget Management (FRBM)target of 3 per cent.
For sustained economic growth and fiscal stability, the government must focus on enhancing tax buoyancy, prudent expenditure management, and structural reforms, the EY report concluded.
