Higher US tariffs, global risks may keep Budget fiscally accommodative

Government debt is estimated to ease to 56.1% of GDP this fiscal year, down from 58.8% in FY22.

• Government likely to avoid aggressive fiscal tightening in upcoming Budget
• Fiscal deficit target expected at 4.2% of GDP, down from 4.4% this year
• India projected to remain fastest-growing major economy in coming years

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The government is expected to avoid aggressive fiscal tightening in the upcoming Budget, choosing instead to preserve room to support the economy amid external pressures, particularly higher US tariffs, The Economic Times reports, citing senior executives at global sovereign rating agencies.

Officials at S&P, Moody's and Fitch told The Economic Times that while reforms-especially deregulation and measures aimed at improving revenue buoyancy-would be viewed positively by ratings agencies, any sharp departure from the recent path of fiscal consolidation that weakens fiscal metrics could weigh on India's credit profile.

Outlining S&P's assessment, YeeFarn Phua, director for sovereign and international public finance ratings for Asia, said the agency's base case for the 2026-27 Budget is one of gradual fiscal consolidation, The Economic Times noted.

Christian de Guzman, senior vice-president at Moody's Ratings, said the limited pace of consolidation expected in FY27 reflects the perceived need to continue supporting the economy amid persistent uncertainty around global demand, even as India has posted strong real GDP growth in recent quarters, the newspaper reported.

Sharing a similar view, Jeremy Zook, director for APAC sovereign ratings at Fitch, told The Economic Times that he expects the government to set a fiscal deficit target of about 4.2% of GDP in the Budget, compared with 4.4% in the current fiscal year.

The Centre has earlier expressed confidence in containing the fiscal deficit at 4.4% of GDP in FY26, a sharp improvement from 9.2% during the pandemic-hit FY21, and better than its initial consolidation target of 4.5% by FY26, The Economic Times said. Government debt is estimated to ease to 56.1% of GDP this fiscal year, down from 58.8% in FY22.

Zook indicated that further narrowing of the deficit would likely come through expenditure adjustments, with some moderation expected in capital spending, The Economic Times reported. Public capex is believed to have peaked and may decline slightly from current levels, he said.

At the same time, de Guzman pointed to subdued nominal growth even as real economic expansion remains robust. He told The Economic Times that faster nominal growth would be required to make meaningful progress in lowering the debt-to-GDP ratio, which is closely linked to nominal GDP expansion.

Official estimates place real GDP growth at 7.4% this fiscal year, while nominal growth is projected at around 8% due to muted price pressures, the newspaper noted. Zook warned that if nominal growth does not return to above 10% in the coming years, reducing the debt burden could become more challenging.

The Economic Times also highlighted that S&P upgraded India's sovereign rating last year to 'BBB' from 'BBB-'-its first upgrade in 18 years-citing economic resilience and sustained fiscal consolidation. Moody's and Fitch, however, have maintained India's rating at the lowest investment grade since 2020 and 2006, respectively, with all three agencies retaining a 'stable' outlook.

Looking ahead, rating executives expect India to remain the world's fastest-growing major economy over the current and next fiscal years, The Economic Times said. S&P projects GDP growth of 6.5% in FY26 and 6.7% in FY27, while Moody's and Fitch estimate growth in the range of 6.4%-7.4% over the same period.

Fresh reform measures could feature in the Budget, with Zook telling The Economic Times that more concrete steps on deregulation are likely. On trade, Phua said a potential deal with Washington could ease uncertainty and boost confidence, particularly in labour-intensive sectors.

While the impact of US tariffs on India has so far been limited, Guzman expects the effect to be moderated by exemptions for key exports such as pharmaceuticals and electronics, as well as India's efforts to diversify trade ties, the newspaper reported. Zook cautioned, however, that over the medium term, US tariffs could emerge as a headwind by weighing on business sentiment, slowing private investment, and reducing India's appeal as a foreign investment destination compared with regional peers that have secured lower tariff barriers.