India’s medium-term fiscal consolidation, critical to any ratings upgrade, is likely to get more challenging as a new coalition government comes to power, an analyst at Fitch Ratings said on Friday.
Prime Minister Narendra Modi’s Bharatiya Janata Party failed to secure a simple majority in the recently concluded parliamentary elections, forcing him to depend on support from regional parties to form the government. Modi will be sworn in for a third term on Sunday.
”Our expectation is that the government will look to achieve the 4.5% fiscal deficit target by 2025-26,” Jeremy Zook, director – Asia-Pacific sovereigns at Fitch told Reuters in an interview.
However, ”beyond FY26, we have little clarity on where the medium-term fiscal path will go,” he said.
The Indian central bank’s record surplus transfer will help the government in achieving its fiscal glide path, but ”the coalition government could make pursuing more medium-term fiscal consolidation slightly more challenging”, Zook said.
For a ratings upgrade, ”what we’re looking for is a continued fiscal consolidation path and confidence that such a path will put debt on a downward trajectory over the medium-term”, he said.
Fitch would like to see durable fiscal consolidation underpinned by revenue-raising measures that can bring down the debt-to-GDP ratio more firmly over the medium-term from around 82% currently.
Moody’s earlier this week said it expects India’s pace of fiscal consolidation to slow down.
Over the last decade, Modi has focussed on investment-led growth while maintaining fiscal prudence.
Fitch expects capital expenditure to continue to be a key priority for the new government, which is due to present the full-year budget in July.
”The biggest challenge in the next budget will be to see how the government balances capex and social spending with fiscal consolidation,” Zook said.
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