Fitch says India to miss FY25 fiscal deficit target of 5.1% by 30 basis points

According to Fitch, it will be challenging for the Indian government to meet its fiscal deficit target of 4.5 percent of GDP by 2025-26.

India's aggressive fiscal consolidation objective for next year is already being doubted, with Fitch Ratings saying it expects the target of 5.1 percent of GDP to be missed by as much as 30 basis points.

"The government has a recent record of achieving fiscal targets, but our latest forecast is that the deficit will reach 5.4 percent of GDP in 2024-25, above the budget's target, based on our more conservative revenue forecasts," analysts from Fitch said in a note released on February 6.

Also Read: FM to ratings agencies – govt bettering fiscal consolidation roadmap

In the interim Budget presented on February 1, Finance Minister Nirmala Sitharaman announced a fiscal deficit target of 5.1 percent of GDP for 2024-25, below economists' expectations of 5.3 percent. This, according to government officials, will help the central government meet its medium-term objective of lowering the deficit to 4.5 percent or below by 2025-26.

However, Fitch has expressed doubt over the government's target.

"We still think it will be challenging for the government to achieve its 2025-26 deficit target," it said.

"Trade-offs between economic growth and consolidation are likely to become more acute in the coming years, and we expect the government to maintain a core focus on economic growth outcomes, particularly by sustaining strong capex. Meanwhile, the slow pace of the fiscal consolidation process in the wake of the pandemic could leave India's public finances exposed in the event of further major economic shocks," it added.

The Indian government has been in a running battle with global ratings agencies – S&P Global Ratings, Moody's Investors Services, and Fitch – as it thinks that the lowest investment grade rating assigned to the country is not a fair reflection of its economic strength. In a post-Budget interview to Moneycontrol, Chief Economic Adviser V Anantha Nageswaran said that while the government would welcome a ratings upgrade, it was not "chasing" one.

Fitch analysts, who affirmed the BBB- rating on India with stable outlook on January 16, also said that while the fiscal deficit target for 2024-25 pointed at a "slightly faster" pace of consolidation than expected, the targets are "broadly in line" with the agency's assumptions when it affirmed its rating on India.

"As such, they are unlikely to lead to significant changes in the sovereign's credit profile, although this modestly reduces near-term risks to the fiscal trajectory and signals the government's commitment to its fiscal consolidation plans," they said.

According to Fitch, India's general government fiscal deficit – Centre plus states combined – is seen at 8.6 percent of GDP in 2023-24. This, it said, is high relative to other countries in the 'BBB' rating category, where the median figure was 3.5 percent of GDP in 2023.

In terms of the stock of public debt, Fitch thinks the government's focus on cutting the deficit will help to "slightly" reduce the debt-to-GDP ratio over the medium term. It expects the ratio to fall slightly over the next five years to just above 80 percent assuming a continued decline in the fiscal deficit and robust nominal growth of around 10.5 percent.

Commenting broadly on the budget, Fitch said that as it was an interim one ahead of the Lok Sabha elections, further clarity on the fiscal plans of the new government will only be available later. However, it expects the fiscal deficit target to be maintained in the full Budget, which will likely be presented in July if the incumbent Bharatiya Janata Party government returns to power. Fitch thinks this is likely to happen.

On capex, Fitch expects the higher target of Rs 11.11 lakh crore for 2024-25 to remain supportive of growth, which it sees moderating to 6.5 percent from 7.3 percent in 2023-24.

"We believe India is well-placed to sustain higher rates of growth in the medium term relative to many of its peers, with the capex drive helping to underpin this view," it said.