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India's fiscal consolidation likely to become challenging with coalition government: Fitch

Jun 07, 2024 07:04 PM IST

Fitch believes India's new coalition government will make medium-term fiscal consolidation more challenging.

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.

The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London.(REUTERS)
The Fitch Ratings logo is seen at their offices at Canary Wharf financial district in London.(REUTERS)

Fiscal consolidation refers to the government’s efforts to reduce the fiscal deficit (Excess of government spending over receipts) and its debts.

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.

Also Read | GDP grows 7.8% in March qtr, full-year reading 8.2%

"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.

Also Read | May GST collection grows 10% y-o-y to 1.73 lakh crore

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.

Also Read | How the Centre should spend the bonanza from RBI

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.

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