NEW DELHI: Fitch Ratings believes the Indian government “should be able to achieve” its goal of reducing the deficit below 4.5% of GDP in FY26, as the Centre has improved its fiscal credibility in recent years.
“The government’s record in recent years of achieving or outperforming on its budget deficit targets has improved its fiscal credibility – the deficit in FY24, at 5.6% of GDP, was well below the original target of 5.9%,” the global ratings agency said in its report.
In the current financial year, the government cut its fiscal-deficit target to 4.9% of the GDP in the full Budget, 20 basis points lower than 5.1% pegged in the interim Budget in February.
Fitch said that the improved target for the current year partly reflects a large dividend (about Rs 2.11 trillion) from the Reserve Bank of India (RBI), received in May. “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.
The budget, released on 23 July, has lowered the central government’s fiscal deficit target for the year ending March 2025 (FY25). It now stands at 4.9% of GDP, 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 said.
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, it said. “The sustained focus on supporting economic growth through high public capex also points to continuity in key areas.”
The ratings agency said that the government’s use of the RBI dividend reinforces our perception of a preference for “fiscal consolidation over additional spending”. It highlighted that the Budget did not provide much clarity on medium-term targets, but 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, it said.
As such 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. “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 upgrade potential for the rating, particularly when combined with the current positive momentum on macroeconomic performance and external finances,” it said.
Source: The Financial Express
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