Fitch Ratings stated on Friday that the slightly accelerated pace of fiscal deficit reduction doesn't significantly alter India's sovereign credit profile. However, the government's focus on deficit reduction is expected to stabilize the debt-to-GDP ratio over the medium term. According to Jeremy Zook, Fitch Ratings Director for Sovereign Ratings, India's government debt-to-GDP ratio is projected to remain broadly stable at just above 80% of GDP over the next five years. This forecast is based on a continued trajectory of gradual deficit reduction and robust nominal growth of around 10.5% of GDP.
In the interim Budget 2024-25 presented in Parliament, the government revised down the current fiscal year's fiscal deficit to 5.8% from the earlier budgeted 5.9%. The deficit is anticipated to decrease to 5.1% in 2024-25 and further to 4.5% by 2025-26, showcasing a commitment to gradual fiscal consolidation even during an election year.
While Fitch noted that this budget aligns broadly with expectations, with a slightly quicker pace of deficit reduction than when India's 'BBB-' rating was affirmed in January, it doesn't significantly alter the sovereign credit profile. Zook highlighted that India's fiscal deficit and government debt ratio are high compared to peer medians, but the government's emphasis on deficit reduction contributes to stabilizing the debt ratio over the medium term.
The budget underscores the government's commitment to fiscal consolidation and its capital expenditure agenda, signaling a clear intent if it returns to office. Fitch acknowledged that the government's fiscal deficit target of 5.1% in FY 2024-25, revised from 5.4%, reflects conservative revenue forecasts, but the government's track record gives credibility to achieving the target.
Finance Minister Nirmala Sitharaman emphasized aligning with and surpassing the fiscal consolidation roadmap, delivering a straightforward message to rating agencies. Fitch, along with S&P and Moody's, currently assigns the lowest investment-grade rating to India, with a stable outlook. Moody's had recently commended the government's commitment to fiscal consolidation goals in the 2024-25 interim budget.
(With Agency Inputs)
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