India’s interim Budget reinforces commitment to gradual fiscal consolidation: Fitch

New Delhi [India], February 6 (ANI): India's interim Budget presented last week pointed to a slightly faster pace of consolidation in the next two fiscal years than was previously expected, and it reinforced its commitments to raise capital investment, said Fitch Ratings.
The targets are broadly in line with Fitch's assumptions when they affirmed India's rating at 'BBB-' with a 'Stable' outlook in January.
As such, they are unlikely to lead to significant changes in the sovereign's credit profile, although this modestly reduces near-term risks to the fiscal trajectory and signals the government's commitment to its fiscal consolidation plans.
The Budget is an interim one, as elections are due in April-May 2024 and the incoming government will provide further clarification of its fiscal plans once it has taken office.
"Pre-election budgets tend to contain limited policy announcements, but budget deficit targets are typically carried through to the post-election budget when the incumbent government returns to office, as we believe is likely this year," the rating agency said.
The government's decision to lower its deficit target for the fiscal year ending March 2024 to 5.8 per cent of GDP, from 5.9 per cent, is a modest change.
"However, we believe it signals a reduced risk that the process of fiscal consolidation could be set back by a pre-election spending surge. In addition, the deficit target of 5.1 per cent of GDP in FY25 would keep the government on track to reach its medium-term goal of narrowing the deficit to 4.5 per cent of GDP in FY26," it said.
The continued emphasis on capex investment, with a further 11 per cent spending increase, should remain supportive of the growth outlook in 2024-25, when real GDP growth is expected at 6.5 per cent.
"Strong capex should - if implemented as planned - reduce infrastructure bottlenecks and improve medium-term growth potential. We believe India is well-placed to sustain higher rates of growth in the medium term relative to many of its peers, with the capex drive helping to underpin this view."
The government has a recent record of achieving fiscal targets, but Fitch's latest forecast is that the deficit will reach 5.4 per cent of GDP in 2024-25, above the budget's target.
Fitch thinks that it will be challenging for the government to achieve its 2025-26 deficit target.
Presenting the Union Budget 2023, Union Finance Minister Nirmala Sitharaman on Thursday pegged the fiscal deficit target for 2024-25 at 5.1 per cent of gross domestic product (GDP).
In 2023-24, the government pegged the fiscal deficit target for 2023-24 at 5.9 per cent of gross domestic product (GDP). Sitharaman as part of her Budget speech said that the fiscal deficit of 2023-24 was downwardly revised to 5.8 per cent. The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings that may be needed by the government.
The government intends to bring the fiscal deficit below 4.5 per cent of GDP by the financial year 2025-26. (ANI)