Fitch Ratings on Friday said India's post-election budget confirms that the new administration remains committed to reducing the fiscal deficit for FY25 and FY26, despite demands of the coalition government.
In the FY25 budget, the government has lowered the Centre's fiscal deficit target for the year ending March 2025 to 4.9 per cent of GDP, from 5.1 per cent in February's interim budget.
The government's fiscal deficit target for FY25 is significantly below the 5.4 per cent that the ratings agency anticipated when it affirmed India's 'BBB-' rating, with a stable outlook, in January 2024.
"India's post-election budget confirms that the new administration remains committed to reducing the fiscal deficit this and next year, despite the demands of the coalition government," Fitch Ratings said in a statement.
The sustained focus on supporting economic growth through high public capex also points to continuity in key areas, it added.
"We believe that it should be achievable as the government's assumption of 10.5 per cent nominal GDP growth in FY25 is modestly below our current forecast. We think the government should also be able to achieve its goal of reducing the deficit below 4.5 per cent of GDP in FY26," Fitch said.
The government's record in recent years of achieving or outperforming its budget deficit targets has improved its fiscal credibility - the deficit in FY24, at 5.6 per cent of GDP, was well below the original target of 5.9 per cent.
Furthermore, the government's use of the RBI dividend reinforces our perception of a preference for fiscal consolidation over additional spending.
The budget did not provide much clarity on medium-term targets but did highlight a desire to manage deficits to keep debt on a declining path.
The long-term deficit target of 3 per cent of GDP under the Fiscal Responsibility and Budget Management Act, 2003 no longer appears to be a guiding objective, Fitch Ratings said.
Generally, public finance metrics remain a weakness in India's credit profile; its fiscal deficit, interest-to-revenue and debt ratios are still high compared with 'BBB' category peers, it said.
Sustained fiscal consolidation that supports a downward trajectory in the government debt ratio over the medium term would support India's credit profile and could ultimately contribute to upgrade potential for the rating, particularly when combined with the current positive momentum on macroeconomic performance and external finances.
The budget highlighted a number of other priority areas for the government, notably around agricultural development, job creation, improving labour skills and strengthening manufacturing.
"We believe the proposals hold some potential to address India's skills gap, particularly in manufacturing, but their effect will ultimately depend on implementation," Fitch said.
In addition to support for micro, small and medium-sized enterprises, the budget included measures to review customs duties over the next six months and reduce foreign firms' corporation tax rate to 35 per cent from 40 per cent.
"We believe these measures should be positive for manufacturing investment, as should public capex-led improvements to transportation infrastructure," Fitch added.
However, land and labour regulations remain significant constraints. The budget highlighted that these will stay largely under the state government's purview, though the central government will incentivise reforms.
"This is broadly in line with our earlier expectations, as advancing such reforms is usually difficult, especially at the national level, and has likely become more politically challenging following the return to coalition government," Fitch said.
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