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Informist, Tuesday, Feb. 4, 2025

--Moody's: India FY26 Budget signals slowing fiscal consolidation

--Moody's: Projected debt-to-GDP fall insufficient to alter India fisc view

--Fitch: India clarifying medium-term debt targets a positive development

--Fitch: India meeting debt targets could improve credit profile over time

--Fitch:See risk of modest slippage in India FY26 revenue collection targets

--Fitch: Believe India govt revenues won't be as buoyant in coming years

NEW DELHI – The Indian government's decision to announce a glide path to reduce its debt-to-GDP ratio has been welcomed by Fitch Ratings, although Moody's Ratings warned the projected improvement "may not be sufficiently material to change our broader assessment that India's fiscal strength will remain weaker than most of its Baa-rated peers".

"Over the next two years, we continue to expect India's general government deficit, which combines the fiscal position of the central and state governments, to remain among the widest when compared to Baa-rated emerging market peers, rendering India's debt burden higher and debt affordability weaker," Moody's analysts said Tuesday.

The Union Budget for 2025-26 (Apr-Mar) presented on Saturday has targeted reducing the central government's debt-to-GDP ratio to 50% by March 2031, with a band of 100 basis points on either side, from 57.1% in FY25. The government said it would keep its annual fiscal deficit each year such that the debt metric declines in line with the path envisioned. While Fitch said Tuesday that clarity on the medium-term debt reduction path is a positive development and sticking to it "could improve the credit profile (of India) over time", the other two major global rating agencies are not as convinced.

Earlier on Tuesday, S&P Global Ratings said a lower debt-to-GDP ratio "would not necessarily lead to an improved debt burden score" for India due to the "very high ratio of government interest servicing to revenue".

S&P and Fitch both rate India at BBB-, although the former has a positive outlook and the latter stable. Moody's, meanwhile, has a Baa3 rating with a stable outlook.

India's high level of public debt--according to the International Monetary Fund, India's total government debt was 83.0% of GDP in 2023--has often been cited as a constraint by rating agencies, which have faced calls from the Indian government to upgrade their assessment. With the government's focus shifting to the debt-to-GDP ratio starting FY27, the annual fiscal deficit may not necessarily reduce at the pace displayed in recent years. For FY26, the finance ministry has estimated the fiscal deficit at 4.4% of GDP, down from 4.8% in FY25, with Moody's commenting that the new target "signals a slowing pace of fiscal consolidation".

Even as it welcomed clarity on the fiscal consolidation front, Fitch said it sees the risk of "modest slippage" in the Centre's revenue collection targets due to weakening of growth, which is seen falling to a four-year low of 6.4% in FY25. Fitch sees India's GDP growth edging up slightly to 6.5% in FY26.

"Policy trade-offs between growth and deficit reduction objectives are becoming more challenging. We believe revenues will not be as buoyant in the coming years, so expenditure restraint, including around capex, will most likely be critical if deficit targets are to be met," Fitch analysts said.  End

Reported by Siddharth Upasani

Edited by Avishek Dutta

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