Global credit rating agencies laud India's FY25 Budget for continued focus on cutting fiscal deficit, infra boost

“Policy continuity is reflected in the government’s capital spending on infrastructure, which remains around 23 per cent of total expenditure, although this is below the 24 per cent spending on interest payments. Overall, the Budget is credit positive as it is expected to keep fiscal deficits at around 4.9 per cent of GDP, lower than the 5.1 per cent of GDP announced in the interim Budget. This places the government's goal of achieving a 4.5 per cent of GDP deficit by fiscal 2025-26 within reach,” Moody’s Ratings said in a statement, reported Business Standard.

S&P Global Ratings said the Budget was in line with its expectations of continued fiscal consolidation. The lower central deficit target matches its projection of a general government deficit at 7.9 percent of GDP for FY25, according to the report.

Similarly, the Modi administration also kept capital expenditure investment intact with Rs 11.1 trillion to capital expenditure, signalling the government’s continued focus on infrastructure development.

S&P Global Ratings noted that it is supportive of long-term economic growth.

“We envisage the proposed tax cuts for foreign companies and initiatives to spur job creation to sustain investments,” it added.

S&P revised India's sovereign credit outlook to positive from stable in May, maintaining its lowest investment grade rating.

Meanwhile, Moody's and Fitch Ratings have kept India's outlook unchanged at stable, with the same sovereign credit rating.

"Lowering of the deficit target to 4.9% from 5.1% of GDP is a clear signal of the government's commitment to deficit reduction," Jeremy Zook, director - Asia sovereign ratings, told Reuters. "In our view, this seems relatively achievable."

It stated that the new deficit target is lower than the 5.4 percent target it predicted when it reaffirmed India's 'BBB-' rating with a stable outlook in January 2024.

However, Fitch highlighted that India's public finance metrics, including the fiscal deficit, interest-to-revenue, and debt ratios, remain relatively weak compared to other countries.

Moody’s indicated that based on the latest budget estimates, it expects general government debt to stabilize above 80 percent of GDP over the next three years, compared to 89.3 percent in FY21.

Moody’s also forecasts that general government interest payments will decrease to around 24 percent of revenue over the next two years, down from over 28 percent in fiscal 2020-21.

However, this remains significantly higher than the median 8.7 percent observed for ‘Baa’-rated peers.