India’s Budget Retains Balance Between Deficit-Cutting And Capex: Fitch

Fitch Ratings said that India’s post-election full budget for FY25 is focused on reducing the fiscal deficit. It noted that the high public capex also points to continuity in key areas.

The report stated that the budget, released on 23 July, has lowered the central government’s fiscal deficit target for the year ending March 2025 (FY25). It now stands at 4.9 per cent of gross domestic product (GDP), from 5.1 per cent in February’s interim budget, significantly below the 5.4 per cent that Fitch anticipated when it affirmed India’s ‘BBB-’ rating, with a Stable Outlook, in January 2024.

The Fitch found that the improved target partly reflects a large dividend from the Reserve Bank of India (RBI), received in May. Fitch believed that it should be achievable as the government’s assumption of 10.5 per cent nominal GDP growth in FY25 is modestly below then its current forecast. Fitch thinks that the government should also be able to achieve its goal of reducing the deficit below 4.5 per cent of GDP in FY26.

Talking about the credit rating of India, the report found that public finance metrics in general remain a weakness in India’s credit profile. However, its fiscal deficit, interest-to-revenue, and debt ratios are still high compared with ‘BBB’ category peers. Sustained fiscal consolidation that supports a downward trajectory in the government debt ratio over the medium term would support India’s credit profile.

The report further highlighted the importance of the center's move to capex spending target in FY25 which was unchanged from the interim budget, at 3.4 per cent of GDP.  A proposal to provide viability gap funding and enabling policies and regulations could encourage private-sector infrastructure investment, though the credit impact on issuers in the sector will depend on the detailed implementation plans, which have not yet been provided.

The report stated that the budget highlighted several other priority areas for the government, notably around agricultural development, job creation, improving labour skills, and strengthening manufacturing. Fitch believed that the proposals hold the potential to address India’s skills gap, particularly in manufacturing, but their effect will ultimately depend on implementation.

In addition, to support micro, small, and medium-sized enterprises, the budget included measures to review customs duties over the next six months and reduce foreign firms’ corporation tax rate to 35 per cent, from 40 per cent. Fitch said it believes these measures should be positive for manufacturing investment, as should public capex-led improvements to transportation infrastructure.

However, Fitch found land and labour regulations remain significant constraints. The budget highlighted that these will stay largely under state government purview, though the central government will incentivise reforms. The report added that Fitch had already predicted this, especially at the national level, and has likely become more politically challenging following the return to coalition government.