The challenging global environment, potential for climate-related shocks and emerging spending needs not currently included in the Budget, could restrict the government’s ability to meet its deficit target, according to Christian de Guzman, Senior Vice-President, Moody’s Investors Service.

Even so, the interim Budget for FY25 firmly conveys the government’s commitment to its fiscal consolidation goals, against the backdrop of healthy economic growth. Further, despite lack of significant tax measures, the government demonstrated fiscal restraint in not resorting to large handouts or increasing discretionary spending ahead of this year’s elections, Moody’s said.

The Finance Minister on Thursday revised the fiscal deficit target for FY24 to 5.8 per cent of GDP from 5.9 per cent. Further, the fiscal deficit for FY25 is pegged much lower at 5.1 per cent.

HDFC Bank said the lower-than-expected fiscal deficit target is despite revenue expenditure over-runs and lower nominal GDP growth in FY24, and is supported by strong tax collection and support from RBI and PSU dividends. Moreover, the cut-back in capital expenditure to the tune of Rs 50,000 crore also provided support and will aid fiscal consolidation going ahead.

“The government anticipates that reduced spending as a percentage of GDP will largely drive the reduction in fiscal deficit, despite ongoing increases in planned infrastructure spending,” Moody’s said, adding that the envisaged fiscal consolidation will not alleviate pressures on debt affordability amidst high current interest rates, as the Budget projects debt servicing costs to account for an increasingly large portion of revenue.

“We expect the final Budget to be released after the elections, to provide more definitive indications of India’s fiscal consolidation trajectory over the medium term,” Guzman said.

The Government’s commitment to fiscal consolidation and the directional trend of moving towards the target of 4.5 per cent fiscal deficit by FY26, combined with the lower borrowing programme for FY25, should improve India’s economic rating and pave the way for a sovereign ratings upgrade.