FM cites India's fiscal discipline as key to Moody's unchanged ratings

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Finance Minister Nirmala Sitharaman on Sunday flaunted India's unblemished track record of not faltering on any of its fiscal consolidation or debt reduction targets as she seemed to shrug off the passiveness of agencies like Moody's which have not upgraded India's ratings.

Sitharaman in her budget for fiscal year beginning April treaded a fine line between fiscal prudence and providing a thrust to growth as she not only gave the middle class the biggest-ever tax relief but also unveiled a glide path for reducing fiscal deficit next year and debt as percentage of GDP by 2031.

India, she said, had to borrow more during the pandemic to meet the fiscal needs of the economy amid global challenges, supply chain disruptions and geopolitical conflicts in two theatres.

"Despite all these we have shown a commitment and following the commitment to the last word as regards fiscal deficit and the glide path that we should follow," she told PTI in an interview. "We have, not one year have we failed (to meet our commitment)".

Moody's Ratings on Saturday ruled out an immediate upgrade of India's sovereign rating despite the government's efforts to manage its finances prudently.

"While we view the government's sustained fiscal discipline and narrower fiscal deficits as credit positive, we don't expect these improvements in the debt burden or 'debt affordability' to be enough to trigger a sovereign rating upgrade at this time," Christian de Guzman, Senior Vice President, Moody's Ratings, had told PTI in an interview on Saturday.

Moody's currently maintains India's sovereign rating at "Baa3" with a stable outlook, which is the lowest investment-grade rating.

While India is making strides toward fiscal discipline and inflation control, Moody's maintains that for a rating upgrade, a substantial reduction in the debt burden and more significant revenue-generating measures are essential. Despite recent improvements, the fiscal deficit and debt-to-GDP ratio remain wider than pre-pandemic levels, with debt servicing costs continuing to take up the largest portion of the budget, even surpassing infrastructure spending, it believed.

A ratings upgrade indicates a reduced perceived risk of defaulting on its debt, which usually leads to lower borrowing costs and increased investor confidence in the country's economy.

In her eighth budget presented on Saturday, the finance minister told Parliament that the fiscal deficit for the current year will be at 4.8 per cent of the GDP as had been promised last year, and that it will be brought down to 4.4 per cent in the 2025-26 financial year.

"Equally to give a long term perspective, we have said that we will manage our debt in such a way that the debt-to-GDP ratio will be continuously" reduced as outlined in an expert committee report, she said, adding debt will be brought down.

The government has volunteered to say that it will manage the debt. "From last year itself we said that we will manage our debt from now so that it comes down to the level recommended by that committee," she said.

The steps taken by the government under Prime Minister Narendra Modi are ones that many of the advanced economies are not doing.

"I'm not comparing my size with any advanced country. But in terms of the principle, cutting down debt to GDP, maintaining fiscal deficit -- these are relentlessly being followed without any negative impact on social welfare schemes, education or health," she said.

Sitharaman went on to state that while sticking to the fiscal consolidation path, there has been no compromise on the public expenditure which is necessary to trigger growth.

"The capital expenditure has not come down. We follow the two cardinal principles to keep your fiscal deficit (under check) and also to borrow only for meaningful capital expenditure," she added.

Sitharaman defended the modest increase in capital spending at Rs 11.21 lakh crore in the next financial year starting April compared to a lowered Rs 10.18 lakh crore in current fiscal, saying the quality of spending is also to be seen.

"If we are looking at the numbers, because we've got used to 16 per cent, 17 per cent increase (in capital spending) every year from 2020, and saying you have not increased it by that number (in the Budget for 2025-26), I would equally want to ask you to please look at the way in which the quality of spending has happened, particularly capital expenditure," she said.

She was also appreciative of the states which received the 50-year interest-free share of the money which went from the Central government's side as capital expenditure for them.

"They have also shown very great interest in capital expenditure and the quality of expenditure, therefore has been very good. At the same time, last year we touched Rs 11.11 lakh crore and this year building on it, it is about Rs 10.1 lakh crore over the revised estimate (RE) which is far more realistic," she said.

The spending in the 2024-25 fiscal was lower than the budgeted Rs 11.11 lakh crore as four months were lost when the general elections were being held in the country.

"But during that year, the election year, which we've just completed, the capital expenditure did go a bit slow. Otherwise my RE would have also been closer to the budget estimate (BE) number again," she added.