India's fiscal strategy gains momentum: Interim budget accelerates consolidation efforts

New Delhi [India], February 6 : India's latest interim budget, unveiled by the central government, underscores a slightly accelerated pace of fiscal consolidation over the next two fiscal years.
Fitch Ratings highlights that these targets align closely with their assumptions when affirming India's rating at 'BBB-' with a Stable Outlook in January.
The budget emphasizes a commitment to enhancing capital investment, which is expected to buoy the nation's growth trajectory while modestly reducing near-term fiscal risks.
As the budget serves as an interim measure ahead of scheduled elections in April-May 2024, it primarily focuses on maintaining continuity in fiscal policies rather than introducing extensive policy changes.
However, the deficit targets outlined in the budget are likely to persist post-election, indicating a sustained commitment to fiscal discipline by the incoming government.
The decision to revise down the deficit target for the fiscal year ending March 2024 (FY24) to 5.8 per cent of GDP from 5.9 per cent signals a reduced risk of pre-election spending surges derailing fiscal consolidation efforts.
Furthermore, the targeted deficit of 5.1 per cent of GDP in FY25 positions the government on track to achieve its medium-term objective of narrowing the deficit to 4.5 per cent of GDP by FY26.
Continued emphasis on capital expenditure (capex) with an additional 11 per cent spending increase is anticipated to bolster India's growth prospects in FY25, supporting Fitch's forecast of 6.5 per cent real GDP growth.
A robust capex program is expected to alleviate infrastructure bottlenecks and enhance the nation's medium-term growth potential.
Fitch maintains a positive outlook on India's growth trajectory, anticipating sustained growth rates relative to its peers, underpinned by the government's capex drive.
Despite the government's track record of meeting fiscal targets, Fitch's forecast suggests the deficit could reach 5.4 per cent of GDP in FY25, slightly above the budget's target, attributed to conservative revenue projections. Achieving the FY26 deficit target may prove challenging, with potential trade-offs between economic growth and consolidation becoming more pronounced.
The government's focus on sustaining robust capex suggests economic growth outcomes will remain paramount, especially amid the ongoing pandemic recovery.
Fitch's January rating affirmation projected a general government deficit, including state deficits, at 8.6 per cent of GDP in FY24, considerably higher than peers in the 'BBB' rating category.
Moreover, deficits under the central government's budget targets are expected to remain elevated over the next two years compared to pre-pandemic levels.
However, the government's commitment to deficit reduction is anticipated to marginally alleviate the nation's high debt ratio over the medium term.
Fitch forecasts a gradual decline in the government debt-to-GDP ratio over the next five years, supported by sustained deficit reduction efforts and robust nominal GDP growth of around 10.5 per cent annually.