Fitch said India using the Reserve Bank of India (RBI) dividend to lower its fiscal deficit target for the fiscal year ending March 2025, reinforces its view that the country prefers fiscal consolidation over additional spending.
In the full Budget presented in July, the government lowered the fiscal deficit target to 4.9% for the current fiscal against 5.1% estimated in February’s interim Budget.
“India has faced few challenges financing its large deficits…India has achieved or outperformed its budget deficit targets in the last few years, improving its fiscal credibility,” Fitch said, adding that it expects India’s debt to GDP ratio to fall between 2024 and 2026.
Still, India’s deficit, and interest-to-revenue and debt ratios remain high compared with ‘BBB’ category sovereign peers, according to the report.
India’s adherence to the Fiscal Responsibility and Budget Management Act (FRBM), effective since 2004, reduced the central government’s deficit in the first few years, and India was upgraded to investment grade in 2006 as a result.However, the central government only once met the act’s deficit ceiling of below 3% of GDP, just before the Global Financial Crisis of 2008.Fitch said that the 3% deficit and 60% debt targets under the FRBM no longer appear to be medium-term fiscal anchors. Instead, in its recent budget, the government signalled a desire to shift to a medium-term focus of putting debt on a downward trend.
“We expect debt/GDP to fall between 2024 and 2026 for India, Japan and Malaysia. However, debt/GDP will remain well above the respective sovereign medians in 2026 in these cases,” the ratings agency said, adding that shocks that challenge the fiscal consolidation trend could put downward pressure on the rating.
As per the report, some sovereigns such as India and the Maldives, have a weaker record of fiscal rule implementation and debt is “significantly higher” than the relevant rating category median for Australia, China, Hong Kong, India, Japan, Malaysia and the Maldives.