New Delhi: Rating agency Fitch on Tuesday said the recent budget reflects the government's commitment to gradual yet steady fiscal consolidation, and that the Centre's clarification on medium-term debt reduction targets, if followed through, could strengthen India's credit profile over time.
Separately, Moody’s said income tax cuts will boost middle-class spending and benefit corporates and the financial sector but warned that the lost revenue could slow fiscal consolidation despite a decline in spending as a share of GDP.
Fitch Ratings has reaffirmed India’s sovereign debt rating at 'BBB-', with a stable outlook, citing the country’s robust medium-term growth prospects and solid external finance position.
The 'BBB' rating reflects low default risk expectations, where the capacity to meet financial commitments remains adequate despite potential vulnerabilities from adverse business or economic conditions.
Moody’s rates India’s sovereign bonds at Baa3 with a stable outlook -- the lowest investment-grade rating. This suggests that while India's bonds qualify as investment grade, they carry a higher risk than some of its peers.
These come after the 2020-21 Economic Survey observed, “Never in the history of sovereign credit ratings has the fifth largest economy in the world been rated as the lowest rung of the investment grade (BBB-/Baa3)."
Finance Minister Nirmala Sitharaman had last October called for improvements in the methodology used by global credit rating agencies to better capture the fundamentals that reflect India's ability and readiness to repay its debt.
"The projections appear realistic: the FY25 figure is close to the 4.9% we expected in August, and our FY26 forecast is identical. Nevertheless, we believe there is a risk of modest slippage in revenue collection targets amid a recent moderation in economic growth," Fitch Ratings said in its report.
"A focus of the budget was bolstering consumption through tax cuts for India’s middle class. This could lift companies’ growth expectations and investment intentions if it succeeds in accelerating consumption. The policy approach of boosting investment through deregulation, as signalled in the budget, is also likely e positive for the investment outlook, which is an important factor for India’s medium-term growth potential," it added.
The budget, presented on 1 February, projected a government deficit of 4.8% of GDP for the fiscal year ending March 2025 (FY25), with a target of 4.4% for FY26. The budget also raised the income tax exemption earnings limit to ₹12 lakh.
"The latest budget signals a slowing pace of fiscal consolidation, as the government seeks to provide firmer support for economic growth amid a dampened macroeconomic backdrop compared to recent years. Still, we expect the government is within reach of its near-term deficit target of 4.5% by fiscal 2025-26," Moody's Rating said in its latest report.
"The increase in exemption limits for income tax will boost disposable income, particularly for urban middle-class households. Along with easing inflation, higher growth in real income will bolster consumption growth, facilitating a credit-positive recovery for many consumer-facing sectors," it added.
To be sure, the Union budget has set a new five-year target to cut the central government’s debt to 50% of gross domestic product, give or take 1%, by 31 March 2031, down from 57.1% in FY25, provided there are no major exogenous macro-economic shocks.
However, including states, India's debt to GDP ratio has hovered over 80%, which according to rating agencies, is a major challenge for the country's ratings upgrade.
Catch all the Business News , Economy news , Breaking News Events andLatest News Updates on Live Mint. Download TheMint News App to get Daily Market Updates.