Global ratings agency Fitch predicted on Monday, February 5, that the fiscal deficit will reach 5.4% of the GDP in FY25, more than the government’s target of 5.1% announced by Finance Minister Nirmala Sitharaman in the interim budget on Thursday, February 1.
Fitch termed the government’s decision to lower the fiscal deficit target for FY24 to 5.8% of the GDP from 5.9% as a “modest change." The deficit target of 5.1% in FY25 would keep the government on track to reach its goal of shrinking the deficit to 4.5% in FY26. But the agency still thinks that it will be challenging for the government to achieve its FY26 deficit target.
However, the rating agency also predicted that the process of fiscal consolidation could be set back by the surge in spending ahead of the general elections.
The 11% increase in capital expenditure for FY25 — if implemented as planned — could achieve real GDP growth of 6.5%. The rating agency said, “We believe India is well-placed to sustain higher rates of growth in the medium term relative to many of its peers, with the capex drive helping to underpin this view.”
The agency further said the slow pace of the fiscal consolidation process as an aftermath of the pandemic could expose India’s public finances in case of any major economic shocks.
“Trade-offs between economic growth and consolidation are likely to become more acute in the coming years, and we expect the government to maintain a core focus on economic growth outcomes, particularly by sustaining strong capex,” the New York and London-based agency added.
Earlier this week, Sitharaman, in an exclusive with Network18's Editor-in-Chief Rahul Joshi, had said credit rating agencies should take note of India's transparent fiscal glide path.
