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Informist, Tuesday, Sept. 2, 2025

 

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--Fitch Zook: India to meet 4.4% FY26 fisc gap aim despite revenue shortfall
--Fitch Zook: Expect India fiscal consolidation pace to slow going ahead
--CONTEXT: Fitch Ratings Director Zook's comments in interview to Informist
--Fitch Zook: Proposed GST rejig to be growth-positive, revenue-negative
--Fitch Zook:See India FY26 nominal GDP growth at 9% vs Budget view of 10.1%
--Fitch Zook: India may cut capex to offset revenue shortfall next few years
--Fitch Zook: See some positive momentum to India's sovereign rating upgrade
--Fitch Zook: India structural fisc metrics weak despite better credibility
--Fitch:Fisc consolidation, high growth to keep supporting India rtg outlook
--Fitch Zook: See some upside to 6.5% India FY26 growth view from Q1 print
--Fitch Zook:See modest impact of near 10 bps on India growth from US tariff
--Fitch Zook: US tariff to hit India business sentiment, pvt capex decisions

By Shubham Rana and Priyasmita Dutta

 

NEW DELHI – The Indian government is likely to meet its fiscal deficit target for the current financial year despite lower nominal GDP growth and potential loss of revenue from proposed changes to the goods and services tax regime, Jeremy Zook, director at Fitch Ratings, said. Beyond FY26, however, fiscal consolidation is likely to become challenging for the government, Zook told Informist in an interview.

 

"Nominal GDP growth is going to be lower than what the Budget assumed...our expectation is that we'll see 9% nominal GDP growth in FY26 and that will add another challenge when it comes to revenue collection," Zook said. "But regardless, the government has shown quite a strong commitment to achieving its fiscal deficit targets and we think that it will look to manage spending side to keep the deficit in line with 4.4% (of GDP)." 

 

The Union Budget for FY26 assumes nominal GDP growth of 10.1%, which is higher by over one percentage point than Fitch's projection. Assuming revenue buoyancy of more than one, the government had also projected tax collections would grow 10.8% on year to INR 42.70 trillion in FY26. Tax buoyancy of over one implies that tax revenues will increase quicker than nominal GDP growth.

 

Taxes, however, have grown only 0.8% in the first four months of the current fiscal year to INR 10.93 trillion. The Centre's revenue collection could come under further strain from the proposed overhaul of the GST regime. The GST Council is set to meet Wed-Thu, and the ministerial panel is looking to lower GST on a plethora of goods and services while also rationalising the number of tax slabs to two from the current four – 5%, 12%, 18%, and 28%.

 

Experts have pegged the potential revenue loss from the GST overhaul between INR 850 billion to INR 2 trillion annually. Zook, who is the primary rating analyst for India, said the GST overhaul is a negative for the government's revenues but the Centre should be able to meet this year's fiscal deficit target.

 

The Centre's revenue collection this year has been much less buoyant than in the past few years. This, and the slower nominal GDP growth, have sparked fears that the government will miss its fiscal deficit target this year. The proposal to lower GST rates has only added to the bond market's worries of fiscal slippage. The yield on the 10-year government bond has risen nearly 20 bps since Prime Minister Narendra Modi first announced the proposal to overhaul the GST regime.

 

According to Zook, the Reserve Bank of India's transfer of a record surplus of INR 2.69 trillion this year gives "a bit of breathing room" to the government. The Union Budget for FY26 had pencilled in INR 2.56 trillion as receipts from RBI's surplus transfer and dividend from state-owned banks.

 

Additionally, Fitch sees space "for the government to make some adjustments on the spending side to accommodate kind of a lower revenue performance."  

 

Any reduction in the government's spending is likely to come at the expense of capital expenditure, both in FY26 and beyond, Zook said. "Certainly, over the next couple years, to try to keep the deficit relatively contained in line with the government's new fiscal goal of keeping debt (relative to GDP) on a downward trend, we do think capex is probably the point that gets squeezed on the spending side," he said. 

 

The Budget for FY26 had announced that the Centre aims to lower its debt-to-GDP ratio to 50% by March 2031 with a band of 100 basis points on either side, from 56.1% at the end of FY26.

 

In the post-COVID era, the Modi government has pressed the accelerator hard on capital expenditure to drive growth in the economy and so, compression of government spending may have a negative impact on domestic growth. Zook said that while a cut in capital spending might be "growth-negative", consumption demand is holding up with private capital expenditure expected to come in firmly.

 

"We believe private capex coming in will be growth-supportive and allow the government to ease off a bit," Zook said. "Of course, the risk to that and the risk to our fiscal outlook would be if private capex doesn't really pick up in a significant way and then government capex has to remain relatively high to keep on supporting growth," he added. 

 

The government's capital expenditure and focus on fiscal consolidation after 2020 and the world-beating growth the economy has logged have helped the country secure its first sovereign rating upgrade in nearly two decades. S&P Global Ratings on Aug. 14 changed India's sovereign rating to 'BBB' from 'BBB-', the first upgrade in 18 years.

 

Eleven days after S&P announced the rating upgrade for India, Fitch retained its 'BBB-' rating with a stable outlook. India's ratings are supported by its robust growth and solid external finances, Fitch said.

 

Fitch had last changed India's rating in August 2006, when it upgraded the rating to BBB- from BB+. While Fitch has kept the rating unchanged in nearly two decades, it has changed the outlook on the rating a few times, shifting between stable and negative. The outlook on the rating is currently stable.

 

"A strengthening record on delivering growth with macro stability and improving fiscal credibility should drive a steady improvement in its structural metrics, including GDP per capita, and increase the likelihood that debt can trend modestly downward in the medium term," Fitch had said  while announcing the rating. "Still, fiscal metrics are a credit weakness, with high deficits, debt and debt service compared with 'BBB' peers."

 

Asked about the possibility of a change in India's rating outlook from stable, Zook said it would come down to "at what stage the improvements in credit metrics kind of offset the structural weaknesses in the fiscal metrics".

 

"So, certainly we have seen improvements in the focus on macro stability and the government's ability to drive relatively strong growth without the emergence of significant imbalances in the economy while at the same time, pursuing some fiscal consolidation," Zook said, adding that this continued path would lead to more upward momentum for the sovereign rating. However, he did not give a timeline on when he expects such a change to materialise.

 

GROWTH & TARIFFS

Fitch expects the Indian economy to grow 6.5% in the current financial year with the latest June quarter print of 7.8%, which was higher than expected, possibly pushing the full-year growth higher, Zook said. The proposed GST rejig would also be growth-positive, he added.

 

Growth this year could also be lower than the 6.5% forecast, which is the same as what the RBI projects, because of the 50% tariff imposed by the US on imports from India, Zook said. He, however, sees the impact of tariffs on India's growth at a modest 0.1% of GDP.

 

The bigger impact of the tariffs, Zook said, could be on the investment sentiment of businesses. "If you look at the private capex cycle, that really hasn't taken off in a big way yet. There's been a lot of global policy uncertainty that's weighed on businesses," Zook said. "And of course, now 50% tariffs by the US poses another challenge for these corporates as they look to make investment decisions."

 

Fitch also does not expect the 50% tariff to persist and anticipates that eventually, there will be a negotiated settlement between the two countries leading to a reduction in the tariff. Of the 50% tariff imposed by the US, 25% is a punitive measure for India's continued purchases of crude oil from Russia, which the US says is funding Moscow's war against Ukraine. Indian oil marketing companies have said they intend to buy oil from Russia as long as it is commercially viable.  End

 

Edited by Avishek Dutta

 

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