Global rating agencies, S&P and Fitch, have expressed confidence in the fiscal consolidation roadmap in the Union Budget for FY26. However, Moody’s said IT relief could slow down fiscal consolidation.

India is pitching hard for rating upgrade and is hopeful that present readings will prompt agencies to go for an upgrade. S&P’s present sovereign rating for India is ‘BBB-’ with a positive outlook. Moody’s has accorded rating of ‘Baa3’ with a stable outlook. Fitch’s rating is ‘BBB-’ with a stable outlook. Ratings by all three are last investment grade rating. Positive outlook means upgrade likely in next 24 months subject to better fiscal and monetary management. Stable means wait for upgrade could be longer.

Meanwhile, S&P Global said on Tuesday that India‘s Union Budget remains in line with its expectation of gradual fiscal consolidation. This undergirds its positive outlook on the sovereign credit ratings. The central government lowered its fiscal deficit estimate for FY25 to 4.8 per cent from 4.9 per cent. It also budgeted a 4.4 per cent deficit for fiscal 2026.

Large dividends

“These targets are broadly consistent with our projections. We believe India will hit its deficit targets despite revenue loss from lifting the threshold for minimum taxable income and slower economic growth. Support will stem from continued large dividends from the central bank and potential capital under-spending,” the agency said.

“The Budget talked about government’s intention from FY27 to shift its fiscal performance anchor to the debt-to-GDP ratio from deficit targets. How the change will affect India‘s fiscal consolidation path is still unclear. The upgrade trigger for our sovereign ratings rests on a meaningful narrowing of India‘s fiscal deficits, such that the net change in its general government debt falls below 7 per cent of GDP on a structural basis,” it said.

Further it added that it might improve the fiscal flexibility and performance score. But a lower debt-to-GDP ratio for India would not necessarily lead to an improved debt burden score. “This is due to the country’s very high ratio of government interest servicing to revenue,” the agency said.

Deficit reduction

According to Fitch Rating, India’s budget signals the government’s intention to keep to a path of gradual but steady deficit reduction, and is broadly in line with the assumptions the agency made when it affirmed the sovereign rating at ‘BBB-’ with a Stable Outlook in August 2024. “We view the government’s clarification of medium-term debt reduction targets as a positive development that, if adhered to, could improve the credit profile over time,” it said.

Calling deficit projections for current and next fiscals, it said that these appear realistic. Nevertheless, “we believe there is a risk of modest slippage in revenue collection targets amid a recent moderation in economic growth,” it said.

Moody’s Ratings feels planned cuts to personal income tax rates will bolster middle-class spending power and consumption, which is credit positive for many corporates and the financial sector. However, “the resulting foregone revenue will slow the pace of the country’s fiscal consolidation even as total spending declines as a share of GDP. The proportion of spending allocated to debt servicing continues to increase,” it said.

Published on February 4, 2025