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Informist, Monday, Feb. 3, 2025

 

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--Fitch: India FY26 Budget highlights govt commitment to deficit reduction 
--Fitch: India FY25, FY26 fiscal deficit aims in line with our expectations 
--Fitch: India FY26 Budget projections appear realistic 
--Fitch: India FY26 Budget will be "broadly neutral for growth" in our view 
--Fitch:India growth, fisc gap reduction trade-off becoming more challenging 
--Fitch:India improving fisc credibility bolstered by sustained deficit fall 
--Fitch: India's fiscal metrics remain weak relative to peers 
--Fitch: India's general govt deficits, debt well above peer medians 
--Fitch: India's debt service burdens well above peer medians 
--Fitch:India debt-GDP path requires fiscal gap to be at or just below 4.4% 
--Fitch: India debt-GDP path highly dependent on nominal GDP growth outcomes 
--Fitch:Increased confidence India can cut debt positive for rating over time 
--Fitch:Pace of India debt decline gradual, leaves open risk from large shock

 

NEW DELHI – India's Union Budget for 2025-26 (Apr-Mar), presented on Saturday, will be "broadly neutral" for growth, Fitch Ratings said on Monday. A consumption boost from tax breaks and a sustained level of capital expenditure should balance the contractionary thrust from reduction in the fiscal deficit, Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings, said in a note.

 

The rating agency also said there is an increased confidence about the Indian government adhering to its medium-term fiscal framework and keep debt firmly on a downward path, which would be positive for the sovereign rating over time. Still, the pace of debt reduction is gradual, which leaves open downside risks from a large economic shock, said Fitch, which affirmed India's sovereign rating at 'BBB-' with a stable outlook in August

 

"The policy focus on boosting investment through deregulation is likely to be positive for the medium-term growth outlook, but the degree of positive impulse will depend on implementation of such policies," Zook said.

 

Finance Minister Nirmala Sitharaman in her Budget speech announced that there will be no tax on personal income of up to INR 1.2 million, a move aimed at reducing the tax burden and increasing disposable income. Sitharaman also tweaked the income tax structure to aid savings and investments of individuals across the income strata. The revised tax slabs will lead to the government forgoing revenue to the tune of INR 1 trillion per annum.

 

 

Concerns about slowing economic growth have increased in recent months with GDP growth estimated to fall to a four-year low of 6.4% in FY25. The Economic Survey has forecast FY26 GDP growth at 6.3-6.8%. 

 

According to Fitch, policy trade-offs between growth and fiscal deficit reduction objectives are becoming more challenging for the Indian government. "Revenues are not likely to be as buoyant in the coming years, which means expenditure restraint, even around capex spending, will likely be key for keeping deficits in check," Zook said.

 

The Budget has targeted a fiscal deficit of 4.4% of GDP for FY26 and the target for the current year has been lowered by 10 basis points to 4.8%. "India's budget highlights the government's ongoing commitment to deficit reduction even amid a recent slowing of economic activity," Fitch said, adding that the deficit targets are in line with the rating agency's expectations. 

 

Fitch called the Budget projections realistic and said "we believe the targets will be achieved". However, there may be some modest slippages on revenue collection amid the moderation in economic growth, which will likely require some further expenditure restraint, Fitch said. 

 

"Sustained deficit reduction, meeting of fiscal targets and continued adherence to transparency further bolsters India's improving fiscal credibility," said the rating agency. "That said, fiscal metrics remain weak relative to peers, with general government deficits, debt and debt service burdens all well above peer medians."

 

The government, which will now target debt-to-GDP ratio instead of a fiscal deficit from FY27, gave a medium-term roadmap on its fiscal strategy in the Budget. The government sees the debt-to-GDP ratio at 50% of GDP, with a band of 100 basis points on either side, from 57.1% in FY25.

 

This roadmap, Fitch said, is helpful in assessing the fiscal path of the Indian government. The government's stated path would require fiscal deficits to be sustained at or just below the 4.4% of GDP deficit target in FY26 and is highly dependent on nominal GDP growth outcomes. "On a general government basis, including the states, which we track for the rating, it would imply deficits of around 7% of GDP and debt in the low 70% of GDP range by FY31."  End

 

Reported by Shubham Rana

Edited by Akul Nishant Akhoury

 

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