ICRA report forecasts tax relief and economic outlook for FY2026

The government is anticipated to offer some relief to personal income taxpayers in the Union Budget for FY2026, according to an ICRA report.

While the report suggests the possibility of modest tax relief, it highlights that these measures are unlikely to significantly impact overall revenue collections.

The government's cautious stance is aimed at maintaining stable and predictable tax inflows.

The report stated, "While there may be some tax relief to personal income taxpayers in the Budget, ICRA believes that its impact on revenues is unlikely to be material, to ensure stable and predictable tax flows in the fiscal."

ICRA forecasts a 12% growth in direct tax collections for FY2026, primarily driven by higher income and corporate tax revenues. Indirect taxes are projected to increase by 9%, with GST collections expected to rise by 10.5%.

Customs duty inflows are forecast to grow at a slower rate of 5%, with potential uncertainties arising from changes in US tariff policies. The overall growth in gross tax revenue (GTR) for FY2026 is anticipated to slightly exceed the nominal GDP growth forecast of 10%, suggesting a tax buoyancy of 1.1.

While a reduction in the revenue deficit is likely, the fiscal deficit in absolute terms is expected to rise to Rs 16 trillion in FY2026, up from Rs 15.4 trillion in FY2025. However, as a percentage of GDP, the fiscal deficit is projected to decrease to 4.5% from 4.8% in FY2025, reflecting the government's fiscal consolidation efforts.

The report added, "ICRA awaits a forward-looking guidance on fiscal deficit targets or Central Government debt/GDP, even as the recommendations by the 16th Finance Commission will also be key, which may be released later in the fiscal."

Regarding capital expenditure, ICRA predicts a capex of approximately Rs 11 trillion for FY2026, aligning with the previous year's budget announcements but representing a 12-13% increase compared to the expected expenditure of Rs 9.7 trillion in FY2025.

This increased capex is consistent with the government's emphasis on stimulating manufacturing, generating employment, and boosting skill development in response to the slowdown in urban consumption and investment activity observed in FY2025.

The report also emphasizes the importance of non-tax revenues, particularly the Reserve Bank of India's (RBI) dividend, in managing the fiscal deficit and creating additional space for capital expenditure in FY2026.

The upcoming budget is expected to focus on promoting economic growth while maintaining fiscal discipline, ensuring the long-term sustainability of public finances.