The Narendra Modi-led government needs to focus on capital expenditure and fiscal consolidation with debt anchoring, pointed out the consulting firm EY today.

“For sustained growth in FY2025-26, reduce fiscal deficit to 4.5%, lower the current debt-GDP ratio and increase investment rate to 34%,” the firm said.

“Key areas of focus are likely to include enhancing public spending, reducing the fiscal deficit, incentivising private sector investment, and introducing targeted tax reforms that foster business innovation,” it said.

On tax front, EY India called for preliminary steps towards the direct tax code, reduction in personal income tax, and reducing compliance burden for the smaller businesses.

“While a full comprehensive review of the direct tax code may take time, we might see some initial steps toward its implementation in this Budget. I also hope for a reduction in personal income tax, particularly for the lower-income groups, to provide relief and stimulate demand. For businesses, particularly SMEs, reducing the complexity of tax compliance is critical. Streamlining TDS rates into fewer categories and eliminating redundant provisions will ease the administrative burden, allowing businesses to focus on growth and innovation,” said Sameer Gupta, national tax leader, EY India.

According to EY India, for sustainable growth in FY26, the government needs to prioritise reducing the fiscal deficit to 4.5% of GDP in FY26, while reducing the debt-to-GDP ratio, which stands at 54.4%, well above the FRBM target of 40%.

“A medium-term real GDP growth target of 6.5% or higher will require boosting the aggregate investment rate (GFCF) measured at constant prices to 34%. This can be achieved by increasing government’s capital expenditure, improving capital efficiency and encouraging states to enhance their investment spending. To stimulate private sector investment, a progressive reduction in interest rates should be considered. Additionally, targeted employment schemes should be fast-tracked to uplift urban demand and support economic momentum in FY26,” it pointed out.

fiscal deficit reduction

Budget 2025: EY India pushes for bold capital expenditure and tax overhaul