Hyderabad: Fitch Ratings Press Points on India’s Budget – Mr. Jeremy Zook, Director, Sovereign Ratings.
The budget presented yesterday was broadly in line with our expectations, though with a slightly faster pace of deficit reduction, from when we affirmed India’s ‘BBB-’ rating with a Stable Outlook in January. As such, it does not significantly change the sovereign credit profile. India’s fiscal deficit and government debt ratio are high relative to peer medians, but the government’s emphasis on deficit reduction helps to stabilise the debt ratio over the medium term.
The government revised lower its current FY24 fiscal deficit to 5.8% from 5.9%, demonstrating a firm desire to adhere to a path of gradual fiscal consolidation even amid an election year.
As expected with the interim budget there were limited policy announcements. Nevertheless, this budget was important in signalling the current government’s clear commitment to fiscal consolidation and its capex agenda, should it return to office.
The targeting of 5.1% of GDP deficit in FY25 demonstrates that the government is strongly committed to reducing the deficit and achieving its deficit target of 4.5% by FY26, while maintaining a critical focus on much-needed infrastructure development. Even so, fiscal deficits remain high relative to pre-pandemic and peer country levels.
The continued emphasis on capex investment, should remain supportive of the growth outlook in FY25, where we forecast real GDP growth of 6.5%.
Our current forecast is for the deficit to reach 5.4% of GDP in FY25, above the budget target due to more conservative revenue forecasts in the next year. But the government has shown a recent record of achieving fiscal targets, which gives credibility for it to reach the 5.1% target.
Over the next five years we forecast India’s government debt to GDP ratio to be broadly stable just above 80% of GDP. This is based on a continued path of gradual deficit reduction, as well as robust nominal growth of around 10.5% of GDP.
