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In a statement released on Friday, Fitch Ratings affirmed that India’s post-election budget reflects the new administration’s commitment to reducing the fiscal deficit for FY25 and FY26, despite the pressures from a coalition government.
Fiscal Deficit Targets Lowered
The FY25 budget has set the Centre’s fiscal deficit target at 4.9% of GDP, down from the 5.1% target in February’s interim budget. This is notably below the 5.4% that Fitch had anticipated when it affirmed India’s ‘BBB-‘ rating with a stable outlook in January 2024.
“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,” Fitch Ratings stated.
Economic Growth and Public Capex
Fitch highlighted that the budget’s focus on economic growth through high public capital expenditure indicates continuity in key policy areas. The agency believes that the government’s assumption of 10.5% nominal GDP growth in FY25 is modestly below its own forecast, making the fiscal targets achievable. Fitch also expects the government to meet its goal of reducing the deficit below 4.5% of GDP in FY26.
Fiscal Credibility Improved
India’s recent track record of meeting or surpassing budget deficit targets has bolstered its fiscal credibility. The FY24 deficit was 5.6% of GDP, better than the original target of 5.9%. The government’s use of the Reserve Bank of India (RBI) dividend further underscores a preference for fiscal consolidation over increased spending.
Medium-Term Targets and Public Finance Metrics
While the budget did not detail medium-term targets, it emphasized managing deficits to ensure debt reduction. The long-term deficit target of 3% of GDP under the Fiscal Responsibility and Budget Management Act, 2003, appears to be less of a priority. Fitch noted that India’s public finance metrics, including fiscal deficit, interest-to-revenue, and debt ratios, remain high compared to peers in the ‘BBB’ category.
Fitch stated, “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.”
Focus on Development and Investment
The budget also highlighted priorities such as agricultural development, job creation, improving labor skills, and strengthening manufacturing. Fitch sees potential in these proposals to address India’s skills gap, especially in manufacturing, though their impact will depend on effective implementation.
Additionally, the budget includes measures to support micro, small, and medium-sized enterprises (MSMEs), review customs duties over the next six months, and reduce the corporation tax rate for foreign firms from 40% to 35%. Fitch commented, “We believe these measures should be positive for manufacturing investment, as should public capex-led improvements to transportation infrastructure.”
Challenges in Land and Labor Reforms
Despite these positive steps, land and labor regulations remain significant hurdles. The budget indicates that these issues will remain largely under state government control, with the central government offering incentives for reforms.
Fitch concluded, “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.”
