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Informist, Tuesday, Feb. 4, 2025

 

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--S&P: India FY26 Budget in line with our view of gradual fisc consolidation 
--S&P: Fisc consolidation in Budget undergirds positive outlook on India rtg 
--S&P: India to meet deficit targets despite revenue loss from tax breaks 
--S&P:Aggregate Indian state fisc deficit may be 2.8%-2.7% of GDP next 3 yrs 
--S&P:India central govt fisc deficits may trend down to 4.2% of GDP by FY28 
--S&P:India general govt fiscal deficit could gradually fall to 6.8% of GDP 
--S&P: Tax cuts in India Budget to boost demand, growth over next few yrs 
--S&P: Economic expansion in India normalising to more sustainable level 
--S&P: See India GDP growth at 6.7% in FY25, 6.8% in FY26 
--S&P: India growth to support fiscal revenue increase despite tax cuts 
--S&P: Slower FY26 capex growth doesn't suggest spend quality deterioration 
--S&P: Unclear how debt-to-GDP aim may affect India fisc consolidation path 
--S&P: Lower debt-GDP may not necessarily improve India's debt burden score 

 

NEW DELHI – The Indian government's decision to lower its debt-to-GDP ratio over the medium term may provide more fiscal flexibility but may not necessarily improve the country's debt burden score, S&P Global Ratings said in a report released Tuesday.

 

The government has said that from financial year 2026-27 (Apr-Mar), it will endeavour to keep the fiscal deficit each year such that the Centre's debt as percent of GDP will be on a declining path. The government will aim to lower its debt to 49-51% of GDP by March 2031 from 56.1% of GDP in FY26.

 

"How the change will affect India's fiscal consolidation path is still unclear," S&P said. "The upgrade trigger for our sovereign ratings rests on a meaningful narrowing of India's fiscal deficits, such that the net change in its general government debt falls below 7% of GDP on a structural basis."

 

S&P said that India is different compared to most regional and global peers as state governments also run persistently high deficits. It expects the aggregate state fiscal deficit to be 2.8-2.7% of GDP over the next three years. Combined with the central government fiscal deficit, which may trend down to 4.2% of GDP by FY28, the general government fiscal deficit could gradually decrease to 6.8% of GDP from 7.8% in FY25, S&P said. 

 

In May last year, S&P had revised the outlook on India to positive from stable, citing the country's robust economic growth, deepening economic reforms, and a view of policy stability. The rating agency had affirmed India's sovereign credit rating at 'BBB-'. 

 

The Union Budget for FY26 has set a fiscal deficit target of 4.4% of GDP for FY26, and has also lowered the target for the current year by 10 basis points to 4.8% of GDP. S&P said that projections in the Budget were broadly consistent with its projections and also in line with its expectations of gradual fiscal consolidation. "This undergirds our positive outlook on the sovereign credit ratings."

 

India will hit its deficit targets despite revenue loss from the tax breaks announced in the Budget and slower economic growth, S&P said. Government finances will be supported by continued large surplus transfer from the Reserve Bank of India and potential capital underspending, the rating agency said. 

 

The Budget 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 incomes. The government has 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 of INR 1 trillion per annum.

 

The tax cuts announced in the Budget will increase domestic demand, which in turn will boost growth over the next few years, said S&P, which projects India's GDP to grow 6.7% in FY25 and 6.8% in FY26 on the back of consumer spending and public investments.

 

The rating agency said that growth is normalising toward a more sustainable level after GDP growth averaged 8.3% over FY22 and FY24. "These growth rates continue to place India above sovereign peers at similar income levels and should continue to support fiscal revenue increase despite the income tax cuts," S&P said. 

 

S&P said the slower growth in capital investments for FY26 does not suggest a deterioration in the quality of government spending. The Budget's allocation for capital expenditure is 3.1% of GDP, unchanged from FY24. "We believe bottlenecks in executing infrastructure projects will ease as supply chain pressures lessen and general elections are over," the rating agency said.  End

 

Reported by Shubham Rana

Edited by Tanima Banerjee

 

 

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