Rating agencies cautious on India's sovereign credit profile post-Budget

Fitch Ratings said that though the interim budget presented was broadly in line with the expectations, it won't change the sovereign credit profile from 'BBB-' with a stable outlook

Global credit rating agencies maintained caution on India’s sovereign credit profile on Friday, a day after the government presented the Interim Budget for FY25 with an aggressive fiscal consolidation plan.

Addressing the customary post-Budget press conference, Finance Minister Nirmala Sitharaman on Thursday said rating agencies should take note that the government has not only aligned with the fiscal consolidation roadmap but also bettered it.

Fitch Ratings in a statement on Friday said that though the Interim Budget was broadly in line with expectations, it won't change the sovereign credit profile from ‘BBB-’ with a stable outlook, as India’s fiscal deficit and government debt ratio are high relative to peer countries.

 

“The Budget presented yesterday (Thursday) was broadly in line with our expectations, though with a slightly faster pace of deficit reduction, from when we affirmed India’s ‘BBB-’ rating with a stable outlook in January. As such, it does not significantly change the sovereign credit profile. India’s fiscal deficit and government debt ratio are high relative to peer medians, but the government’s emphasis on deficit reduction helps to stabilise the debt ratio over the medium term,” it said.

Nevertheless, the rating agency took note of the limited policy announcements in the Budget and government’s clear commitment to fiscal consolidation and its capex agenda for infrastructure development.

“Even so, fiscal deficits remain high relative to pre-pandemic and peer country levels. Our current forecast is for the deficit to reach 5.4 per cent of GDP in FY25, above the Budget target due to more conservative revenue forecasts in the next year. But the government has shown a recent record of achieving fiscal targets, which gives credibility for it to reach the 5.1 per cent target,” it added.

Echoing similar views, Moody's Investors Services in a statement said that though the government demonstrated fiscal restraint in not resorting to large handouts or increasing discretionary spending ahead of this year's elections, 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.

“Given the challenging global environment and the potential for climate-related shocks, emerging spending needs not currently included in the Budget could restrict the government's ability to meet its deficit target. 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,” it added.

S&P Global Market Intelligence, a separately managed division of S&P Global, said the aggressive fiscal deficit target for FY25 is more of a signal that the government remains committed to reducing its Budget deficit in line with its medium-term fiscal consolidation plan and the actual fiscal deficit target is likely to be revised in the final Budget after the polls.

“The actual capital expenditure outlay is well below the capital spending growth target of 33 per cent in the FY24 Budget. This would nonetheless keep the government’s infrastructure investment agenda rolling. However, the contribution of fixed investment to GDP growth in the upcoming fiscal is unlikely to rise meaningfully. Combined with another round of rising food prices, still high-interest rates and lingering external risks, this would lead to a milder real GDP growth,” it said in a statement.