New Delhi, February 4 (PTI): S&P Global Ratings has expressed a positive outlook on India’s economic prospects following the announcement of the Union Budget for the 2025-26 fiscal year, forecasting that the proposed income tax cuts will spur domestic demand, driving growth over the next few years. The agency also affirmed that India is on track to meet its targeted fiscal deficit of 4.4% for the year, despite the introduction of increased income tax rebates.
According to S&P, the Indian government’s budget aligns with its expectations for a gradual fiscal consolidation, which is a key factor underpinning its stable sovereign rating of ‘BBB-’. The projected fiscal deficit targets are consistent with S&P’s projections, despite anticipated revenue losses due to the lifting of the minimum taxable income threshold and slower economic growth.
Deficit Targets and Fiscal Support
S&P remains confident that India will meet its fiscal deficit goals, supported by continued large dividends from the central bank and potential underspending on capital expenditures. “We believe that India will achieve its deficit targets even with a loss in revenue from the tax changes, as the support from central bank dividends and possible capital underspending will play a key role,” the agency stated.
The budget for FY 2026 is expected to boost economic growth by stimulating domestic demand, primarily through income tax reductions for households. S&P forecasts that consumer spending, coupled with public investment, will maintain real GDP growth at 6.7% in fiscal year 2025 and 6.8% in 2026. These growth rates are anticipated to place India ahead of its sovereign peers at similar income levels, helping to sustain fiscal revenue growth despite the tax cuts.
Fitch Ratings Highlights Debt Reduction Clarification
In a separate analysis, Fitch Ratings praised the Indian government’s clarification on medium-term debt reduction targets, stating that if adhered to, this could improve India’s credit profile over time. Fitch currently assigns India the lowest investment-grade rating of ‘BBB-’ with a stable outlook.
The government’s medium-term fiscal strategy aims to reduce central government debt to approximately 50% of GDP by FY 2031, which is a 7 percentage point decrease from the projected level in FY 2025. According to Fitch, this plan provides greater flexibility to manage fiscal deficits, depending on economic conditions.
“The government’s clearer focus on a medium-term debt reduction target is viewed positively, and if adhered to, it could contribute to a better credit profile,” Fitch commented in a statement.
GDP Growth and Budget Impact
Fitch has also projected a real GDP growth of 6.4% for the current fiscal year and 6.5% for the following year. While the tax cuts are expected to provide a modest boost to consumption, Fitch anticipates that government capital expenditures (capex) will remain relatively high. However, the overall impact on fiscal deficit reduction could be slightly contractionary.
The income tax cuts are seen as a challenge for raising the revenue-to-GDP ratio, which remains relatively low. Fitch also expressed concerns over the sustainability of revenue from central bank dividends, which could fluctuate in the coming years.
The tax relief could positively influence corporate growth expectations and investment intentions, provided it stimulates consumption. Moreover, Fitch highlighted that the budget’s emphasis on deregulation to boost investment could enhance India’s medium-term growth potential, though the full impact will depend on the government’s ability to implement related policies effectively.
Conclusion
Both S&P and Fitch have highlighted the 2025-26 Budget’s potential to foster economic growth through strategic fiscal measures, with S&P particularly optimistic about its long-term impact on domestic demand. As India works towards achieving fiscal deficit targets, the success of the budget will hinge on the execution of its policies, particularly in boosting consumption and investment.
According to S&P, the Indian government’s budget aligns with its expectations for a gradual fiscal consolidation, which is a key factor underpinning its stable sovereign rating of ‘BBB-’. The projected fiscal deficit targets are consistent with S&P’s projections, despite anticipated revenue losses due to the lifting of the minimum taxable income threshold and slower economic growth.
Deficit Targets and Fiscal Support
S&P remains confident that India will meet its fiscal deficit goals, supported by continued large dividends from the central bank and potential underspending on capital expenditures. “We believe that India will achieve its deficit targets even with a loss in revenue from the tax changes, as the support from central bank dividends and possible capital underspending will play a key role,” the agency stated.
The budget for FY 2026 is expected to boost economic growth by stimulating domestic demand, primarily through income tax reductions for households. S&P forecasts that consumer spending, coupled with public investment, will maintain real GDP growth at 6.7% in fiscal year 2025 and 6.8% in 2026. These growth rates are anticipated to place India ahead of its sovereign peers at similar income levels, helping to sustain fiscal revenue growth despite the tax cuts.
Fitch Ratings Highlights Debt Reduction Clarification
In a separate analysis, Fitch Ratings praised the Indian government’s clarification on medium-term debt reduction targets, stating that if adhered to, this could improve India’s credit profile over time. Fitch currently assigns India the lowest investment-grade rating of ‘BBB-’ with a stable outlook.
The government’s medium-term fiscal strategy aims to reduce central government debt to approximately 50% of GDP by FY 2031, which is a 7 percentage point decrease from the projected level in FY 2025. According to Fitch, this plan provides greater flexibility to manage fiscal deficits, depending on economic conditions.
“The government’s clearer focus on a medium-term debt reduction target is viewed positively, and if adhered to, it could contribute to a better credit profile,” Fitch commented in a statement.
GDP Growth and Budget Impact
Fitch has also projected a real GDP growth of 6.4% for the current fiscal year and 6.5% for the following year. While the tax cuts are expected to provide a modest boost to consumption, Fitch anticipates that government capital expenditures (capex) will remain relatively high. However, the overall impact on fiscal deficit reduction could be slightly contractionary.
The income tax cuts are seen as a challenge for raising the revenue-to-GDP ratio, which remains relatively low. Fitch also expressed concerns over the sustainability of revenue from central bank dividends, which could fluctuate in the coming years.
The tax relief could positively influence corporate growth expectations and investment intentions, provided it stimulates consumption. Moreover, Fitch highlighted that the budget’s emphasis on deregulation to boost investment could enhance India’s medium-term growth potential, though the full impact will depend on the government’s ability to implement related policies effectively.
Conclusion
Both S&P and Fitch have highlighted the 2025-26 Budget’s potential to foster economic growth through strategic fiscal measures, with S&P particularly optimistic about its long-term impact on domestic demand. As India works towards achieving fiscal deficit targets, the success of the budget will hinge on the execution of its policies, particularly in boosting consumption and investment.
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