Fitch Ratings on Tuesday said the FY25 Budget demonstrated the government's ongoing commitment to reducing fiscal deficit and ensured policy continuity during the NDA government's new term.
Finance Minister Nirmala Sitharaman on Tuesday presented the first Budget of the Modi 3.0 government in which she revised the deficit target for current fiscal lower to 4.9 per cent of the GDP, from 5.1 per cent projected in the interim Budget.
The deficit was 5.6 per cent in the 2023-24 fiscal year.
"Today's FY25 Budget demonstrated the government's ongoing firm commitment to deficit reduction, while keeping an eye towards growth by maintaining its capex push.
"In all, the budget highlighted clear policy continuity during the NDA government's new term," said Jeremy Zook, director and primary sovereign analyst for India, Fitch Ratings.
Zook said sustained fiscal consolidation, which supports a downward trajectory in the government debt ratio over the medium-term would be supportive of India's credit profile, particularly when combined with the current positive momentum on macroeconomic performance and external finances.
"We will continue to assess the impact the gradual improvement in the fiscal outlook will have on the medium-term debt trajectory as a key factor in our ongoing monitoring of India's rating," Zook added.
By revising the deficit target lower, the government provided a clear signal of this commitment to deficit reduction, as it put the bulk of the excess RBI dividend towards lowering the deficit rather than accommodating new spending.
"The new FY25 deficit target is also below the 5.4 per cent of GDP we forecast when we last affirmed India's 'BBB-' rating with a stable outlook in January 2024," Fitch said.
Fitch said the 4.9 per cent of the GDP deficit target appears achievable, given the reasonable macroeconomic assumptions, including from 10.5 per cent nominal GDP growth, "which is modestly below our current forecast".
Further, the government's recent record of achieving or outperforming its deficit targets has improved its fiscal credibility.
"We also think it is likely that the government will achieve its longstanding FY26 target for a fiscal deficit of below 4.5 per cent of GDP, as this should be within reach from current deficit levels," Zook said.
However, the Budget did not provide any additional clarity on the medium-term fiscal management objectives and targets, which is something we thought may have been forthcoming at the onset of the new term, Zook added.
Public finance metrics remain a relative weakness in India's credit profile with the fiscal deficit, interest-to-revenue and debt ratios still high compared to peers, Fitch added.
