New Delhi, Feb 3 (PTI) – Fitch Ratings on Monday highlighted concerns about India's gradual pace of debt reduction, warning that a major economic shock could pose a downside risk to its sovereign rating. Despite this, the agency expressed confidence in India's adherence to its medium-term fiscal framework aimed at reducing debt over time.
"Increased confidence that the government can adhere to this medium-term fiscal framework and keep debt firmly on a downward path would be positive for the sovereign rating over time," said Jeremy Zook, Director and Primary Sovereign Analyst for India at Fitch Ratings, while commenting on India's 2025 Budget.
However, he cautioned that the slow pace of debt reduction leaves room for risks in case of a significant economic downturn.
The fiscal deficit targets set in the Union Budget align with Fitch's projections, with a FY25 target of 4.8% of GDP and a FY26 target of 4.4%. He described these projections as realistic, but warned that slower economic growth could lead to minor revenue slippages, necessitating strict expenditure control.
On Saturday, Finance Minister Nirmala Sitharaman presented the Budget for FY25, reaffirming these deficit targets, which Fitch sees as crucial to maintaining India's fiscal credibility.
Zook highlighted the delicate trade-off between economic growth and fiscal consolidation, emphasizing that tight expenditure controls—even in areas like capital investment—will be necessary to keep deficits in check.
The Indian government has outlined a long-term fiscal strategy aiming to reduce central government debt to 50% of GDP by FY31, a drop of around 7% from FY25 levels. Achieving this would require maintaining fiscal deficits at or below 4.4% of GDP, a task heavily reliant on nominal GDP growth.
If this strategy holds, the general government deficit (including states) would be around 7% of GDP, and the debt-to-GDP ratio could settle in the low 70% range by FY31.
Fitch’s assessment aligns with this view, indicating that while India has taken steps towards fiscal consolidation, the road ahead remains challenging. The effectiveness of policy implementation and economic growth sustainability will be key to maintaining its sovereign rating stability.
"Increased confidence that the government can adhere to this medium-term fiscal framework and keep debt firmly on a downward path would be positive for the sovereign rating over time," said Jeremy Zook, Director and Primary Sovereign Analyst for India at Fitch Ratings, while commenting on India's 2025 Budget.
However, he cautioned that the slow pace of debt reduction leaves room for risks in case of a significant economic downturn.
Fiscal Deficit Targets Align with Expectations
In August 2024, Fitch reaffirmed India's sovereign rating at 'BBB-' with a stable outlook, maintaining its position at the lowest investment grade since August 2006. Zook noted the government’s ongoing commitment to deficit reduction, even in the face of economic slowdown.The fiscal deficit targets set in the Union Budget align with Fitch's projections, with a FY25 target of 4.8% of GDP and a FY26 target of 4.4%. He described these projections as realistic, but warned that slower economic growth could lead to minor revenue slippages, necessitating strict expenditure control.
On Saturday, Finance Minister Nirmala Sitharaman presented the Budget for FY25, reaffirming these deficit targets, which Fitch sees as crucial to maintaining India's fiscal credibility.
Budget's Impact on Growth and Investment
Fitch categorized the budget as broadly neutral for growth, noting that tax cuts and capital expenditure investments may counterbalance the contractionary effects of fiscal deficit reduction. The policy push towards investment through deregulation is expected to boost medium-term growth, though its success will depend on effective implementation.Zook highlighted the delicate trade-off between economic growth and fiscal consolidation, emphasizing that tight expenditure controls—even in areas like capital investment—will be necessary to keep deficits in check.
India's Debt Metrics Lag Behind Global Peers
Fitch also underscored that despite fiscal consolidation efforts, India’s fiscal metrics remain weaker than its global peers. The agency pointed out that India's general government deficits, debt, and debt service burdens are significantly higher than the median for similar economies.The Indian government has outlined a long-term fiscal strategy aiming to reduce central government debt to 50% of GDP by FY31, a drop of around 7% from FY25 levels. Achieving this would require maintaining fiscal deficits at or below 4.4% of GDP, a task heavily reliant on nominal GDP growth.
If this strategy holds, the general government deficit (including states) would be around 7% of GDP, and the debt-to-GDP ratio could settle in the low 70% range by FY31.
Moody’s Unlikely to Upgrade India’s Sovereign Rating Soon
Meanwhile, global credit rating agency Moody’s has ruled out an immediate upgrade of India’s sovereign rating, despite the government's efforts to maintain fiscal discipline. The agency stated that to secure a rating improvement, India must significantly enhance its debt burden and debt affordability.Fitch’s assessment aligns with this view, indicating that while India has taken steps towards fiscal consolidation, the road ahead remains challenging. The effectiveness of policy implementation and economic growth sustainability will be key to maintaining its sovereign rating stability.