India’s Fiscal Deficit Set to Shrink, Tax Revenues Drive Growth: World Bank

India's fiscal deficit is on track for a steady decline, fueled by robust growth in tax revenues, according to the latest World Bank report. The report underscores the positive fiscal trajectory, stating, "In India, fiscal deficits are expected to continue shrinking, largely on account of growing tax revenues," signalling a solid foundation for the government’s fiscal consolidation efforts.

While fiscal deficits across South Asia are projected to remain constrained, India stands out for its improving fiscal position. In contrast, other countries in the region, such as Pakistan and Bangladesh, face challenges as fiscal adjustments are offset by escalating interest payments and infrastructure investments.

Despite this positive outlook for India, the World Bank cautioned that government debt-to-GDP ratios across South Asia will remain elevated, with a gradual decline expected. Persistent high borrowing costs are anticipated to keep debt-servicing burdens high for many nations in the region.

Inflation in South Asia is forecast to moderate over the coming years, supported by stabilizing exchange rates. India, Nepal, and Sri Lanka are expected to keep inflation within or below target ranges, contributing to an improved macroeconomic environment.

India is projected to continue its strong economic growth, remaining the fastest-growing major economy globally. The World Bank forecasts a GDP growth rate of 6.7% for FY2025-26 and FY2026-27. This growth will be driven by a thriving services sector and an expanding manufacturing base, supported by government initiatives aimed at improving logistics infrastructure and simplifying tax regulations.

Private consumption in India is expected to rise, fueled by a strengthening labor market, increased access to credit, and easing inflation. Investment growth is also forecast to remain robust, supported by rising private investments, strong corporate balance sheets, and favorable financing conditions. These factors are expected to bolster India’s economic resilience, positioning it for sustained growth in the coming years.