Govt hopeful of ratings upgrade as Budget draws debt-reduction roadmap

Finance Minister Nirmala Sitharaman on February 1 reiterated the Centre's commitment to link its fiscal deficit glide path to its debt-to-GDP ratio.

The government is hopeful of getting a sovereign ratings upgrade, given that it has kept to its fiscal glide path and also specified a target for debt reduction over the years, sources told Moneycontrol.

“Sovereign rating upgrade will come in time, we have delivered on our promise of keeping to fiscal consolidation while ensuring capex push. We also have a defined debt-reduction plan,” a person aware of the developments said.

A ratings upgrade enhances the credibility of any economy and boosts investor confidence, typically leading to more foreign inflows into a country.

The government is set to better its FY25 fiscal deficit estimate of 4.9 percent. In the Budget presented on February 1, the government indicated that the deficit will settle at 4.8 percent for the current fiscal and decline to 4.4 percent in the next.

In the Budget, the government also defined a glide path, staring FY27, to bring down its debt-to-GDP ratio to 49-51 percent by 2031.

In her Budget speech, finance minister Nirmala Sitharaman on February 1 reiterated the Centre's commitment to link its fiscal deficit glide path to its debt-to-GDP ratio.

This means that the new medium-term fiscal consolidation path has been linked to a reduction in the debt-to-GDP ratio instead of merely focusing on progressively targeting a narrower fiscal deficit.

The choice of debt-to-GDP ratio as the fiscal anchor is in line with current global thinking. It encourages shift from rigid annual fiscal targets towards more transparent and operationally flexible fiscal standards.

S&P Ratings was the only agency to have recently revised India’s outlook to positive from stable earlier this year.

India is rated BBB- by Fitch and S&P and Baa by Moody’s.

“Increased confidence that the government can adhere to this medium-term fiscal framework and keep debt firmly on a downward path, would be positive for the sovereign rating over time. Still, the pace of debt reduction is gradual, which leaves open downside risks from a large economic shock,” Jeremy Zook, Director and Primary Sovereign Analyst for India at Fitch Ratings, said, reacting to the Budget.

India's growth likely slowed to 6.4 percent in FY25 compared with 8.2 percent in the previous fiscal. The Economic Survey, released a day before the Budget, pegged FY26 growth at 6.3-6.8 percent.

A similar view was also expressed by Moody’s Ratings.

“Although the Union government remains on track to meet its near-term policy goals, we do not expect a sufficient improvement in the debt burden, or the proportion of the Budget earmarked for debt servicing to change our broader assessment that India’s fiscal strength will remain weaker than most of its investment-grade peers,” said Christian de Guzman, Senior Vice President, Moody's Ratings.