The fiscal deficit target of 4.5% of gross domestic product in FY26 would be a challenge for the government amidst a focus on capex to support growth, according to global ratings agency Fitch.
Fitch projects the Indian economy to grow 6.5% in FY25, helped by 11% growth in government capex.
In the interim budget before national elections, the finance minister increased the centre’s capex outlay for FY25 to Rs 11.1 lakh crore from Rs 10 lakh budgeted for FY24.
“Trade-offs between economic growth and consolidation are likely to become more acute in the coming years, and we expect the government to maintain a core focus on economic growth outcomes, particularly by sustaining strong capex,” Fitch noted in a note on Monday.
The government has set a target of 5.1% fiscal deficit for FY25, down from 5.8% as per revised estimate for FY24.
Fitch also said that the new government post-elections will likely stick to the fiscal path laid down in the interim budget.
The rating agency pointed out that while the faster pace of consolidation signalled by the government will reduce near-term risks, it did not warrant a change in India’s rating owing to high debt and deficit levels relative to peers.
“The slow pace of the fiscal consolidation process in the wake of the pandemic could leave India’s public finances exposed in the event of further major economic shocks,” Fitch pointed out; it expects the centre’s fiscal deficit at 5.4% in FY25.
The rating agency in January had reaffirmed India’s rating at BBB- rating with a stable outlook.
“We forecast the government debt to GDP ratio to decline marginally over the next five years to just above 80% of GDP. This is based on a continued path of gradual deficit reduction, as well as robust nominal growth of around 10.5% of GDP,” it said.