Fiscal Deficit Target Achievable, Says Fitch Ratings
However, public finance metrics, in general, remain a weakness in India’s credit profile, the ratings agency said.
Sustained fiscal consolidation that supports a downward trajectory in the government debt ratio over the medium term could ultimately contribute to the upgrade potential of the rating, said Fitch Ratings.
India’s post-election budget confirms that the new administration remains committed to reducing the fiscal deficit this and next year, despite the demands of the coalition government, the ratings agency said in a note on Friday. The sustained focus on supporting economic growth through high public capex also points to continuity in key areas, it added.
The budget has lowered the central government’s fiscal deficit target for the year ending FY25. It now stands at 4.9% of GDP, up from 5.1% in February’s interim budget, "significantly below the 5.4% that we anticipated when we affirmed India’s ‘BBB-’ rating, with a stable outlook, in January 2024," Fitch Ratings said.
"We believe that it should be achievable as the government’s assumption of 10.5% nominal GDP growth in FY25 is modestly below our current forecast," it said, adding that the government should also be able to achieve its goal of reducing the deficit below 4.5% of GDP in FY26.
The government’s record in recent years of achieving or outperforming on its budget deficit targets has improved its fiscal credibility, the ratings agency said, adding that the government’s use of the RBI dividend reinforces the perception of a preference for fiscal consolidation over additional spending.
While the budget did not provide much clarity on medium-term targets, it did highlight a desire to manage deficits to keep debt on a declining path. The long-term deficit target of 3% of GDP under the 2003 Fiscal Responsibility and Budget Management Act no longer appears to be a guiding objective.
Public Finance Metrics Still Weak At Large
Public finance metrics, in general, remain a weakness in India’s credit profile; its fiscal deficit, interest-to-revenue and debt ratios are still high compared with ‘BBB’ category peers, the ratings agency reiterated. Sustained fiscal consolidation that supports a downward trajectory in the government debt ratio over the medium term would support India’s credit profile and could ultimately contribute to upgrading potential for the rating, particularly when combined with the current positive momentum on macroeconomic performance and external finances.
Land and labour regulations remain significant constraints, Fitch said. The budget highlighted that these will stay largely under state government purview, though the central government will incentivise reforms. "This is broadly in line with our earlier expectations, as advancing such reforms is usually difficult, especially at the national level, and has likely become more politically challenging following the return to coalition government."
