Fitch, a global ratings agency, forecasts India’s fiscal deficit to reach 5.4% of GDP in FY25, surpassing the government’s target of 5.1% announced by Finance Minister Nirmala Sitharaman. The agency views the government’s adjustment of the FY24 deficit target to 5.8% from 5.9% as modest. Achieving the FY25 target is seen as critical for reaching the goal of a 4.5% deficit in FY26. However, Fitch believes this target might be challenging due to potential setbacks, particularly from increased spending before general elections.
Challenges in Fiscal Consolidation
- Fiscal Deficit Projections: Fitch predicts a fiscal deficit of 5.4% for FY25, beyond the government’s 5.1% target.
- Impact of Capital Expenditure: An 11% rise in capital expenditure for FY25, if executed as planned, could drive real GDP growth to 6.5%. However, this could impede fiscal consolidation efforts.
- Long-Term Growth Outlook: Fitch sees India favorably positioned for sustained growth relative to peers, with emphasis on capex supporting this view.
- Risk of Economic Shocks: The slow pace of fiscal consolidation post-pandemic may leave India vulnerable to major economic shocks, underscoring the need for balanced growth and consolidation.
Government Response
- Emphasis on Transparency: Finance Minister Sitharaman highlights India’s transparent fiscal glide path in discussions with media, urging credit rating agencies to consider this aspect.
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