India’s pace of debt reduction creates downside risk: Fitch ratings

India’s pace of debt reduction is gradual, leaving its sovereign rating vulnerable to potential downside risks in the event of a major economic shock, Fitch Ratings said on Monday.The rating agency, however, expressed confidence in the government’s ability to stick to its medium-term policy framework which aims to reduce debt and bring it on a downward trajectory over time.

“Increased confidence that the government can adhere to this medium-term fiscal framework and keep debt firmly on a downward path, would be positive for the sovereign rating over time,” said Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings.

The budget reflects the government’s commitment to reducing the fiscal deficit despite slowing economic growth, according to Fitch.

The fiscal deficit target for 2025-26 was set at 4.4% of gross domestic product (GDP), down from the revised 4.8% of GDP this fiscal year.

Zook said the budget projections appear realistic, and the agency believes that they will be achieved.In August 2024, Fitch upheld India’s sovereign rating at ‘BBB-‘ with a stable outlook. It has kept the rating unchanged at ‘BBB-‘, the lowest investment grade, since August 2006. The Centre plans to cut fiscal deficit and reduce government debt-to-GDP ratio to 50% with a tolerance of one percentage point above or below that figure by 2030-31 or 7% of GDP lower than 2024-25, Fitch said. This requires keeping the fiscal deficit at or below 4.4% of GDP next fiscal, which is highly dependent on nominal GDP growth, it noted.

The government has forecasted a 10.1% nominal GDP growth for 2025-26, expecting the economy to reach ₹357 lakh crore, up from the revised estimate of ₹324.1 lakh crore for this fiscal.

Zook said the government’s revenue collections may decline slightly amid a moderation in economic growth, which will likely require further expenditure restraint.

Revenue receipts are projected to reach ₹34.2 lakh crore in 2025-26, an increase of 10.8% from the revised ₹30.9 lakh crore for 2024-25.

Finance minister Nirmala Sitharaman, in her budget speech, announced that no income tax would be levied on those earning up to ₹12 lakh annually. Additionally, capital expenditure is projected to rise by 10.1% to ₹11.2 lakh crore in 2025-26 from ₹10.2 lakh crore this fiscal.

Fitch projects neutral growth, as consumption boosts from tax cuts, along with sustained capital expenditure, is expected to offset the contractionary impact of deficit reduction.

“The policy focus on boosting investment through deregulation is likely to be positive for the medium-term growth outlook, but the degree of positive impulse will depend on implementation of such policies,” it said.