Fiscal conditions to constrain credit growth in 2025, says Moody's

ICRA, in its report on Budget expectations, estimated the fiscal deficit target for FY2026 to be set at 4.5 per cent of GDP

India’s fiscal conditions will continue to constrain its credit strength in 2025 but it may benefit from a shift in trade and investment flows from China, Moody’s Ratings said on Wednesday in its Asia-Pacific 2025 outlook.

 

“We expect only gradual fiscal consolidation, and debt to remain significantly higher than the Baa-rated peer median of around 57 per cent,” Moody’s Ratings said. It added that proposed trade restrictions by the US would weaken economic output across the region.

 

ICRA, in a report on Budget expectations, said that fiscal deficit target for financial year 2026 (FY2026) is estimated to be set at 4.5 per cent of GDP, entailing a reduction of 25-30 bps over the projected 4.8 per cent of GDP in FY25. Government has set the fiscal deficit target for FY2025 at 4.9 per cent of GDP.

 

ICRA said, “Government’s target for non-tax revenues, particularly the RBI dividend could be a game changer for the FY26 Budget math and a sharp swing on this account, vis-à-vis ICRA’s projections could alter the fiscal deficit and/or create space for additional capex.”

 

The Indian government’s commitment to funding job creation and enhancing social welfare programs, Moody’s Ratings said, can help tackle critical social issues such as high youth unemployment, but it would slow fiscal consolidation.

 

“Beyond trade, geopolitical risk will add to fiscal pressures as defense spending increases… India’s defense spending will grow rapidly amid tensions with China and Pakistan,” the report said.

 

The ratings agency said that India’s debt affordability would remain much weaker than rated peers despite gains in the revenue. Moody’s said that the growth and inflation in Asia-Pacific are levelling out, with strong domestic demand bolstered by modest easing in global and regional financial conditions.

 

In India, it said, household spending, private and public infrastructure investment will support expansion.

 

Moody’s said a range of geopolitical and domestic political risks persist and after key elections in 2025, governments may need to make choices between whether to fulfil political promises or to focus on fiscal consolidation.

 

ICRA in its report noted that the Centre is likely to reinforce focus on employment and skilling to address labour market issues and may allocate Rs 300-350 billion towards the employment-linked incentive and internship schemes, launched in the July 2024 Budget.

 

ICRA also said that the allocation for the PLI scheme may be raised in FY2026, with the likely extension of the scheme to other labour-intensive sectors to boost domestic manufacturing.

 

“Government is expected to focus on operationalising the measures to enhance credit flow to the MSME sector that were announced in the FY2025 Union Budget,” ICRA said.