According to Zook, the Budget was largely in line with Fitch Ratings expectations and did 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 reducing the deficit helps to stabilise the debt ratio over the medium term, Zook remarked.
“This Budget sought to maintain a balance of sustaining a growth-oriented focus through a further increase in capex spending, while maintaining an eye toward deficit reduction. The government aims for modest fiscal consolidation, while accommodating a higher capex spend and changes to income tax slabs, largely by substantially reducing subsidies in the coming year,” Zook said.
Adding further, Zook said given the uncertainty in the global economy and commodity prices, there is potential downside risk to the deficit target before the next general elections, in particular in the event that a shock such as another commodity price spike leads to pressures for sustained subsidy spending.
The Budget’s nominal growth and revenue assumptions are broadly credible, in our view, though risks remain tilted to the downside given the uncertain global outlook. The government’s real GDP growth assumption of 6.5 per cent is slightly higher than our 6.2 per cent, but nominal growth forecasts are similar, Zook said.
The government’s continued emphasis on ramping up capex spending should provide a fillip to both near- and medium-term growth.
According to Zook, India is well-placed to sustain higher rates of growth in the medium-term than many of its peers, with the capex drive helping to underpin this view.
It is likely to be challenging for the Indian government to achieve its 4.5 per cent of GDP deficit target by FY26, as achieving this target implies an additional 0.7 per cent of GDP consolidation in each of the subsequent two fiscal years. Nevertheless, the commitment to reducing the fiscal deficit is a positive signal for debt sustainability.
“Over the next five years we forecast India’s government debt to GDP ratio to stabilise at around 82 per cent. This is based on a continued path of gradual deficit reduction, as well as robust nominal growth of around 10.5 per cent of GDP. Our robust growth outlook for India is a key factor supporting the stabilisation of the debt ratio in the absence of stronger deficit reduction,” Zook said.