Revised lower fiscal deficit, fiscal consolidation may pave way for India’s rating upgrade in FY26

Budget

The revision of fiscal deficit lower and fiscal consolidation path ahead by the government is expected to pave way for the ratings upgrade of India in the financial year 2025-26, experts said about the Budget 2024.

“Commitment of fiscal consolidation in the year ahead, improves chances of India Rating upgrade in FY26,” said Deepak Agrawal, CIO-Debt, Kotak Mahindra AMC.

Similarly, Sakshi Gupta, Economist at HDFC Bank, said this is positive for India’s rating outlook, a further sustained reduction in combined fiscal debt over the medium term — to bring India closer to (in terms of debt, per capita income etc.) other peer countries in the higher rating bracket would be a catalyst for a rating upgrade in the medium term.

"On May 29, ratings agency S&P stated that it has revised outlook for India to positive from stable on robust growth and rising quality of government spend. Along with that, the ratings agency affirmed our 'BBB-' long-term and 'A-3' short-term unsolicited foreign and local currency sovereign credit ratings," said Gupta.

Also, Citi economists wrote in a note that S&P Global Ratings' to upgrade India's sovereign rating by late 2026 given the ratings agency's confidence in the South Asian nation's macro drivers as well as the flow of economic and political cycles.

However, prior to this, another rating agency’s official said, according to a media report, India’s inclusion in a key global bond index will not be enough for Moody’s Ratings to upgrade the country from the lowest investment grade as it needs structural reforms to improve its fiscal metrics.

“This would be a possibility in FY26 with central fiscal deficit targeted to reduce to 4.5 percent of GDP,” said Gaura Sengupta, Economist at IDFC First Bank.

Somnath Mukherjee CIO & Sr. Managing Partner, of ASK Private wealth in a report said The government stuck to the Interim Budget deficit
numbers. The same focus on medium term reduction of deficit and debt along with smaller and effective government - all backed by credible estimates which possibly have scope for betterment by the end of the year.

Mukherjee further added that however, there were a few discernable changes too. For one the government was somewhat fortuitous to receive higher dividend from RBI reflected in non-tax revenue exceeding Interim Budget estimate by around Rs 1.5 lakh crore. Government used half of it for accelerated deficit reduction and managed to bring down the fiscal deficit to 4.9% of GDP from 5.1% estimated during Interim Budget. The other major
chunk was to enhance the revenue expenditure with a proximate aim to promote jobs growth.

In the Union Budget 2024, Finance Minister Nirmala Sitharaman has reduced the fiscal deficit target to 4.9 percent of the GDP for 2024-25, from the target of 5.1 percent pegged in the interim Budget.

It was already a huge 70 basis points (Bps) less than the previous fiscal’s revised estimate of 5.8 percent. One basis point is a hundredth of a percentage point.

Further, the Finance Minister set the fiscal deficit target even lower at 4.5 percent for the next financial year 2025-26.

The central government has been rapidly reducing its fiscal deficit target after it ballooned to 9.2 percent in 2020-21 due to the coronavirus pandemic.

Moneycontrol had earlier reported that the government may reduce fiscal deficit due to fiscal space created by the higher than expected dividend transfer by the Reserve Bank of India (RBI).

The RBI Central Board of Directors has approved the transfer of Rs 2.11 lakh crore as surplus to the government for the financial year 2023-24, the RBI said in a statement on May 22. This was arguably the highest ever yearly surplus transfer to the government by the Indian central bank.