The fiscal deficit in India is expected to shrink continuously, driven by growing tax revenues, according to the latest World Bank report.

The report noted that this trend is anticipated to contribute to fiscal consolidation policies of the government. It said “In India, fiscal deficits are expected to continue shrinking, largely on account of growing tax revenues”.

The World Bank noted that while fiscal deficits in most countries in South Asia are expected to remain generally tight, India stands out with its improving fiscal position.

However, the report highlighted that region-wide fiscal deficits, excluding India, are projected to remain stable. This is due to fiscal adjustments being offset by increased interest payments in Pakistan and infrastructure investments in Bangladesh.

Despite the improving fiscal scenario, the report cautioned that government debt-to-GDP ratios in South Asia will remain high, although they are expected to decline gradually. Debt-servicing costs are projected to stay elevated in several countries due to persistently high borrowing costs.

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It said “While government debt-to-GDP ratios in the region are expected to decline gradually, they will remain elevated”. Inflation in the region is forecasted to moderate further during the projection period, supported by stabilizing exchange rates.

The report highlighted that inflation is expected to stay within or below target ranges in most countries, including India, Nepal, and Sri Lanka.

On the economic growth front, India is predicted to maintain its position as the fastest-growing economy among the world’s largest economies.

The World Bank projected India’s GDP growth at 6.7 per cent for both FY2025-26 and FY2026-27. The World Bank says that India’s services sector is set to witness sustained growth, while manufacturing activity is expected to strengthen, aided by government initiatives to enhance logistics infrastructure and streamline tax reforms.

The labour market’s improvement, expanding credit availability, and easing inflation is likely to boost private consumption growth. However, government consumption growth is expected to remain restrained.

“The services sector is expected to enjoy sustained expansion, and manufacturing activity is anticipated to strengthen, supported by government initiatives to enhance logistics infrastructure and improve the business environment through tax reforms” said the report.

Investment growth in India is projected to remain steady, driven by rising private investment, healthy corporate balance sheets, and improved financing conditions. These factors are expected to further reinforce the country’s economic resilience in the coming years.

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