Business Standard

Sustained fiscal deficit reduction positive for India's ratings: Fitch

Fitch Ratings said in a press statement that this dividend would help India in meeting the fiscal deficit target of 5.1 per cent of GDP for FY25

growth gdp economy

Ruchika Chitravanshi New Delhi

Listen to This Article

Sustained fiscal deficit reduction, particularly if underpinned by durable revenue-raising reforms, would be positive for India’s sovereign ratings fundamentals over the medium term, Fitch Ratings said on Monday.

The rating agency’s statement comes in the backdrop of the recent larger-than-expected Reserve Bank of India (RBI) dividend of Rs 2.1 trillion to the Centre.

Fitch Ratings said in a press statement that this dividend would help India in meeting the fiscal deficit target of 5.1 per cent of GDP for FY25 and could be used to lower the deficit beyond the current target.
 
Fitch Ratings’ analysis said that in the post-election budget, the new government would have two alternatives. The government could keep the current fiscal deficit target for FY25 and use the windfall to boost spending on infrastructure. It could also offset any upside spending surprises or lower-than-budgeted revenue, such as from divestment.

“Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1 per cent of GDP. The government’s choice could give greater clarity around its medium-term fiscal priorities,” the rating agency said.

The new government’s budget, likely to be presented in July following the swearing-in of the new government, will determine how the dividend will be used. Fiscal deficit and GDP data for 2023-24 will be released by the government on May 31.

The government, under its fiscal glide path, aims to reduce the fiscal deficit to 4.5 per cent of GDP by 2025-26 (FY26).

The dividend transfer by RBI was well above the budgeted figure of Rs 1.02 trillion in the Interim Budget for 2024-25 (FY25), which includes dividends from both the RBI and financial institutions.

Fitch Ratings said that the transfers from RBI to the government depend on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate.

“Transfers may also be influenced by the RBI’s views on what level of buffer is appropriate to maintain on its own balance sheet. The potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such a high level,” Fitch Ratings report said.

It also said that an important driver of higher RBI profits appears to be higher interest revenue on foreign assets, though the central bank has not yet provided a detailed breakdown.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: May 27 2024 | 4:48 PM IST

Explore News