Lower debt-to-GDP ratio could boost India’s chances of a credit rating upgrade: Fitch

New Delhi: Sustained fiscal consolidation that helps lower the debt-to-GDP ratio over the medium term could boost India's prospects for a rating upgrade, rating agency Fitch said, “particularly when combined with the current positive momentum on macroeconomic performance and external finances”.

India's government debt-to-GDP is higher than that of its BBB-rated peers, Fitch noted. As of July, India's government debt was 56.8% of its GDP, according to the finance ministry.

The rating agency said India's post-election budget showed continuity in narrowing the fiscal deficit and high public capex for key areas. India's administration has remained committed to reducing the fiscal deficit in this year and the next, despite the demands of a coalition government, Fitch said. The government's budgetary allocations for public capital expenditure also underscore its focus on promoting economic growth, it added.

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The Indian government lowered its fiscal deficit target for FY25 to 4.9% of GDP in the budget announced earlier this week. This was "significantly below the 5.4% that we anticipated when we affirmed India’s ‘BBB-’ rating, with a stable outlook, in January 2024," Fitch said.

The government’s record of outperforming its budget deficit targets in recent years has improved its fiscal credibility, Fitch said, pointing to the deficit of 5.6% of GDP in FY24, which was well below the original target of 5.9%. “The government’s use of the RBI dividend reinforces our perception of a preference for fiscal consolidation over additional spending,” the rating agency added. Mint previously reported that a significant chunk of the RBI dividend would be used to narrow India’s fiscal deficit.

Long-term 3% target no longer a pipe dream

The budget pointed to the government's intent to keep debt "on a declining path," Fitch said, adding, "The long-term deficit target of 3% of GDP under the 2003 Fiscal Responsibility and Budget Management Act no longer appears to be a guiding objective.”

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In her FY22 budget address, finance minister Nirmala Sitharaman had said India's fiscal deficit would be trimmed to 4.5% of GDP by FY26 with a ‘glide path’, a method of achieving self-imposed targets to prevent the negative effects of ballooning budgetary deficits.

The government's newly proposed policies on skilling, particularly in the manufacturing sector, have the potential of addressing the country's skill gaps, but will only be effective if implemented properly, Fitch said. The government's corporate tax cut for foreign companies from 40% to 35% and its public capex-backed infrastructure push will be a positive sign for manufacturing investment, it added.

Private capex needs a boost

A day before the government presented the budget, the finance ministry's Economic Survey for FY24 indicated that private investment in infrastructure was lacklustre. A proposal to provide viability gap funding and enabling policies and regulations could encourage private-sector investment in infrastructure, Fitch said. A clearer estimate of the credit impact of these plans will depend on the detailed implementation plans, which have not yet been provided, it noted.

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Fitch, which the downgraded the US from ‘AAA’ to ‘AA+’ in July 2023, indicated that land and labour reforms proposed in the budget would be difficult to implement in the coalition government. While these reforms will remain in the purview of states, the union government plans to incentivise them using interest-free loans, according to the finance minister's budget speech.