Credit rating agencies upbeat on India's fiscal consolidation plan

Moody's Ratings notes that the Budget is credit positive

Global credit rating agencies have given thumbs up to the FY25 Budget, lauding the government's firm commitment to deficit reduction, with Moody’s Ratings noting that the Budget is credit positive.

“Policy continuity is reflected in the government’s capital spending on infrastructure, which remains around 23 per cent of total expenditure, although this is below the 24 per cent spending on interest payments. Overall, the Budget is credit positive as it is expected to keep fiscal deficits at around 4.9 per cent of GDP, lower than the 5.1 per cent of GDP announced in the interim Budget. This places the government's goal of achieving a 4.5 per cent of GDP deficit by fiscal 2025-26 within reach,” Moody’s Ratings said in a statement.

S&P Global Ratings said India’s final Budget is consistent with its expectation of the government’s commitment to fiscal consolidation. And, the lower central deficit target is in line with its forecast of general government deficit at 7.9 per cent of GDP for FY25.

“Likewise, the unchanged allocation of Rs 11.1 trillion to capital expenditure signals the Modi administration’s continued focus on infrastructure investment, which we view as supportive of long-term economic growth. We envisage the proposed tax cuts for foreign companies and initiatives to spur job creation to sustain investments,” it added.

S&P revised India’s sovereign credit outlook to positive from stable in May keeping intact its lowest investment grade rating. Moody’s and Fitch Ratings have kept India’s outlook unchanged at stable with the same sovereign credit rating.

Fitch Ratings, in a statement, said that the FY25 Budget demonstrated the government's firm commitment to deficit reduction, while keeping an eye on growth by maintaining its capex push.

“Revising lower the FY25 deficit target provides a clear signal of this commitment to deficit reduction, as it puts the bulk of the excess Reserve Bank of India (RBI) dividend towards lowering the deficit rather than accommodating new spending. This new deficit target is also below the 5.4 per cent target we forecast when we last affirmed India’s ‘BBB-’ rating with a stable outlook in January 2024,” it added.

However, Fitch said public finance metrics remain a relative weakness in India’s credit profile with the fiscal deficit, interest-to-revenue and debt ratios still high compared to peers.

“Sustained fiscal consolidation, which supports a downward trajectory in the government debt ratio over the medium term would be supportive of India’s credit profile, particularly when combined with the current positive momentum on macroeconomic performance and external finances. We will continue to assess the impact the gradual improvement in the fiscal outlook will have on the medium-term debt trajectory as a key factor in our ongoing monitoring of India’s rating,” it added.

Moody’s said taking into consideration the latest budget estimates, it projects general government debt to stabilise above 80 per cent of GDP over the next three years, down from 89.3 per cent in FY21.

“We also forecast general government interest payments to fall to around 24 per cent of general government revenue over the next two years from over 28 per cent in fiscal 2020-21, although this remains much higher than the median 8.7 per cent recorded by ‘Baa’-rated peers,” it said.