India has made notable progress in restoring fiscal discipline after the economic shock of the pandemic. The country’s fiscal deficit, which had climbed to around 9.2% at the peak of the crisis, has now been brought down to nearly 4.4%. This sharp correction reflects strong fiscal consolidation efforts by the government over the past few years. However, the road ahead appears far more challenging, especially as policymakers weigh the possibility of GST rate cuts and income tax relief in the coming financial years.

Slowing Pace of Fiscal Consolidation

While the reduction in fiscal deficit so far has been impressive, the pace of improvement is expected to slow significantly. For FY27, the projected reduction is only about 0.1 percentage points. This suggests that the phase of relatively “easy” deficit reduction—driven by post-pandemic recovery, higher revenues, and one-off gains—may be coming to an end. From here on, every incremental improvement will require tougher choices.

The government is now operating in a more constrained environment, marked by rising public debt, higher interest payments, and increasing demands on public spending. In such a scenario, any policy decision that affects revenue or expenditure could have a direct impact on fiscal targets.

Tax Relief vs Revenue Stability

One of the biggest policy dilemmas facing the government is whether to offer relief through lower GST rates or cuts in income tax. On the one hand, tax relief can boost consumption, improve household savings, and support economic growth. On the other hand, it can reduce government revenues at a time when maintaining fiscal discipline is already difficult.

If GST rates are reduced or income tax slabs are made more generous, the immediate impact would likely be felt on the revenue side. This could make it harder to achieve the targeted fiscal deficit of around 4.3%, unless the shortfall is offset through higher growth or alternative revenue sources.

Rising Expenditure Pressures

At the same time, expenditure commitments are also set to increase. One major factor on the horizon is the proposed 8th Pay Commission, which could significantly raise salary and pension payouts for government employees. Such revisions typically have a long-lasting impact on public finances, as they permanently raise the government’s expenditure base.

In addition to pay-related costs, the government must continue spending on infrastructure, social welfare schemes, and development programs to sustain economic momentum. Balancing these priorities while keeping the deficit under control will be a complex task.

Factors Offering Short-Term Support

To manage these pressures, the government is counting on several supporting factors. These include dividend transfers from the Reserve Bank of India, proceeds from disinvestment of public sector assets, and an assumption of around 10% nominal GDP growth. Together, these elements could provide short-term fiscal breathing space.

However, experts caution that such measures cannot be relied upon indefinitely. Dividends and disinvestment receipts are inherently uncertain, and economic growth can fluctuate due to global and domestic factors. Depending too heavily on these sources may create vulnerabilities over the longer term.

The Challenge of Long-Term Fiscal Sustainability

The broader concern is long-term fiscal sustainability. Stable and predictable revenue growth, combined with disciplined and efficient spending, is essential to keep public finances on a healthy path. Frequent tax changes or large expenditure commitments without matching revenue measures could undermine this balance.

Economists argue that while selective tax relief may be justified to support demand or specific sectors, it should be carefully calibrated. Broad-based cuts, if not backed by strong growth or structural reforms, could complicate fiscal management and increase borrowing needs.

A Delicate Balancing Act Ahead

Ultimately, the government faces a delicate balancing act. It must support economic growth, respond to public expectations for tax relief, and meet rising expenditure obligations—while still adhering to fiscal consolidation goals. The choices made in the coming years will determine whether India can maintain credibility on fiscal discipline without sacrificing growth and social priorities.

As debates around GST rate rationalisation, income tax relief, and higher spending commitments continue, fiscal prudence is likely to remain at the center of policy discussions. Striking the right balance will be the government’s biggest test in the post-pandemic economic phase.