India's pace of debt reduction remains gradual, says Fitch Ratings

India's pace of debt reduction is gradual, which leaves open downside risks to sovereign ratings in the eventuality of a significant economic shock, said Fitch Ratings on Monday, commenting on the Union Budget 2025.

 

However, the rating agency expressed confidence in India's ability to stick to its medium-term fiscal framework and keep debt firmly on a downward path, which would be positive for the sovereign rating over time.

 

“Increased confidence that the government can adhere to this medium-term fiscal framework and keep debt firmly on a downward path, would be positive for the sovereign rating over time. Still, the pace of debt reduction is gradual, which leaves open downside risks from a large economic shock,” said Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings in a statement.

 

In August 2024, the global credit rating agency had affirmed India's sovereign rating at 'BBB-' with a stable outlook.

 

On Saturday, Union Finance Minister Nirmala Sitharaman in her FY26 Budget announced a new glide path with debt to gross domestic product (GDP) ratio as the fiscal anchor, moving away from the current practice of targeting fiscal deficit. The six-year road map till 2030-31 (FY31) aims to bring down debt to GDP ratio to a range of 47.5-52 per cent from 57.1 per cent in FY25.

 

For FY26, the budget pegs debt to GDP ratio at 56.1 per cent — assuming nominal GDP growth of 10.1 per cent — effectively aiming to bring it down by 1 percentage point a year.

 

“This approach would provide requisite operational flexibility to the government to respond to unforeseen developments. At the same time, it is expected to put the central government debt on a sustainable trajectory in a transparent manner,” said the ‘Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement presented along with the Union Budget.

 

Zook said that such a roadmap would require fiscal deficits to be sustained at or just below the 4.4 per cent of GDP deficit target in FY26 and is highly dependent on nominal GDP growth outcomes.

 

“On a general government basis, including the states, which we track for the rating, it would imply deficits of around 7 per cent of GDP and debt in the low 70 per cent of GDP range by FY31,” he said.

 

Zook further highlighted that policy tradeoffs between growth and fiscal deficit reduction objectives are becoming more challenging, as he noted the government's ongoing commitment to deficit reduction, even amid a slowing economic environment.

 

“The budget will be broadly neutral for growth in our view, as the consumption boost from tax cuts, along with sustained levels of capex spending should balance the contractionary thrust from deficit reduction. Revenues are not likely to be as buoyant in the coming years, which means expenditure restraint, even around capex spending, will likely be key for keeping deficits in check,” he added.

 

On the policy deregulation front, he noted that the policy focus on boosting investment through deregulation is likely to be positive for the medium-term growth outlook, but the degree of positive impulse will depend on implementation of such policies.