The fiscal consolidation path undertaken by the Union government is credit-positive and will make the debt stabilise above 80% of GDP over the next three years, according to Moody's Ratings. Further, this debt level may remain higher than its peers, the rating agency said.
Moody's expects the federal government's interest payments to fall to around 24% of revenue over the next two years from over 28% in fiscal 2020–21. "This remains much higher than the median 8.7% recorded by Baa-rated peers,” Gene Fang, associate managing director, Moody's Ratings, said.
The Union government will target a fiscal deficit of 4.9% of the gross domestic product for FY25, as compared to a target of 5.1% set in the interim budget, Finance Minister Nirmala Sitharaman announced in her budget speech on Tuesday.
Policy continuity is reflected in the government's capital spending on infrastructure, which remains around 23% of total expenditure, Fang said. Overall, the budget is credit-positive as it is expected to keep fiscal deficits lower than what was announced in the interim budget, the agency said.
"This places the government's goal of achieving a 4.5% GDP deficit by fiscal 2025–26 within reach."
Higher gross tax collections are expected to drive revenue growth in the ongoing fiscal year, while a stronger-than-expected dividend payout from the Reserve Bank of India has provided additional fiscal space, it said. "Although future dividends will depend on market conditions."
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