The interim Budget does not significantly change the sovereign credit profile of India even as the government has aimed at slightly faster pace of deficit reduction, international credit ratings agency Fitch Ratings has said.

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, Jeremy Zook, Director, Sovereign Ratings, said.

Zook said the interim Budget presented on Thursday was broadly in line with Fitch Ratings’ expectations, though with a slightly faster pace of deficit reduction, from when it affirmed India’s ‘BBB-’ rating with a Stable Outlook in January 2024.

Fitch Ratings’ forecasts fiscal deficit to reach 5.4 per cent 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 per cent target”, Zook added.

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The targeting of 5.1 per cent of GDP deficit in FY25 demonstrates that the government is strongly committed to reducing the deficit and achieving its deficit target of 4.5 percent 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, Zook added.

The government on Thursday revised lower its current FY24 fiscal deficit to 5.8 per cent from 5.9 per cent, 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,” Zook added.

Fitch Ratings expects the continued emphasis on capex investment to remain supportive of the growth outlook in FY25. It sees India clocking a real GDP growth of 6.5 percent in FY25.

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Over the next five years, Fitch Ratings forecast India’s government debt to GDP ratio to be broadly stable just above 80 per cent of GDP. This is based on a continued path of gradual deficit reduction, as well as robust nominal growth of around 10.5 per cent of GDP, Fitch Ratings has said.

Despite the strong intent to do well on fiscal consolidation front, India continues to face challenges in enhancing its credit ratings due to elevated debt levels and the substantial cost associated with servicing that debt, say economy watchers. 

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