India’s medium-term fiscal consolidation is likely to get more challenging as a new coalition government comes to power, an analyst at credit rating agency Fitch, said on Friday, according to a Reuters report.
Fiscal consolidation refers to the government’s efforts to reduce the fiscal deficit (Excess of government spending over receipts) and its debts.
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Fiscal consolidation is an important factor for credit rating agencies to perform rating upgrades or downgrades.
Prime Minister Narendra Modi’s Bharatiya Janata Party failed to secure a majority in the recently concluded parliamentary elections, forcing him to depend on support from regional parties to form the government, the report read.
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“Our expectation is that the government will look to achieve the 4.5% fiscal deficit target by 2025-26,” Jeremy Zook, director of Asia-Pacific sovereigns at Fitch told Reuters in an interview. “Beyond FY26, we have little clarity on where the medium-term fiscal path will go,” he added.
Finance Minister Nirmala Sitharaman had trimmed the fiscal deficit down to 5.8% from 5.9% of gross domestic product forecast earlier. Sitharaman also pegged the fiscal deficit target at 5.1% for the next fiscal year, while India keeps aiming to reach a fiscal deficit level below 4.5 per cent of the GDP by 2025-26, according to an Economic Times article.
The lower fiscal deficit target for the financial year 2024-25 was expected on hopes of strong tax collections and relatively lower spending on subsidies, according to the article.
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The Indian central bank’s record surplus transfer will help the government in achieving its fiscal glide path, but “the coalition government could make pursuing more medium-term fiscal consolidation slightly more challenging”, Zook told Reuters.
Surplus transfer is when the Reserve Bank of India (RBI) transfers its surplus (Excess of income over expenditure) to the government.
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For a ratings upgrade, “what we’re looking for is a continued fiscal consolidation path and confidence that such a path will put debt on a downward trajectory over the medium-term”, he said.
Fitch would like to see durable fiscal consolidation underpinned by revenue-raising measures that can bring down the debt-to-GDP ratio more firmly over the medium-term, according to the Reuters report. India’s debt to GDP ratio is currently at 82%.
Moody’s earlier this week also said it expects India’s pace of fiscal consolidation to slow down.
Fitch expects capital expenditure to continue to be a key priority for the new government, which is due to present the full-year budget in July.
“The biggest challenge in the next budget will be to see how the government balances capex and social spending with fiscal consolidation,” Zook said.
