Moody's Labels India's Budget 'Tactical' but Sees No Credit Breakthrough

Moody's Ratings described India's latest federal budget as tactical rather than transformative, saying planned fiscal consolidation that reduces the budget gap to 4.3% from 4.4% of GDP will not change the country's credit profile. The assessment reflects concerns that fiscal metrics have not recovered to pre-Covid levels despite a longer track record of deficit consolidation. The economy is projected to expand about 7.4% in the current financial year while inflation is expected to be near 2%.

Key Points

Planned fiscal consolidation narrows India's budget gap to 4.3% of GDP from 4.4% but is not viewed as a credit profile changer.
Economic projections for the current financial year include 7.4% growth and inflation near 2%; the fiscal deficit for the year is 4.4% of GDP.
Moody's reaffirmed long-term local- and foreign-currency sovereign ratings last year and kept a stable outlook, citing economic resilience and dependable domestic funding.

Moody's Ratings has characterized India's annual federal budget plan as tactical, noting that the measures announced do not amount to a breakthrough for the country's sovereign credit outlook. Christian de Guzman, senior vice president at Moody's Ratings, said the government intends to pursue fiscal consolidation that would narrow the budget gap to 4.3% of gross domestic product from 4.4% in the current year, but that this change alone will not alter India's credit profile.

De Guzman emphasized that, "(Despite India’s) lengthening track record of deficit consolidation or fiscal discipline, this deficit is still wider than what it was prior to Covid." He added, "We haven’t seen the fiscal metrics improve sufficiently enough to actually change the credit profile."

The budget outlook includes an economic growth projection of 7.4% for the current financial year, with inflation expected to be around 2%. For the year in progress, the fiscal deficit is set at 4.4% of GDP.

Last year, Moody's Ratings affirmed its long-term local- and foreign-currency sovereign ratings for India and maintained a "stable" outlook. In doing so, the ratings agency cited the sustained strength of the Indian economy and the availability of reliable domestic funding for financing the government's budget deficits.

The comments from Moody's underscore a view that, while the government is taking steps toward narrower deficits, the pace and scale of consolidation are not yet large enough to prompt an upgrade or a material change in the assessment of sovereign creditworthiness. The agency's earlier affirmation of ratings and the stable outlook were linked to economic resilience and dependable domestic financing sources.

Contextual notes

The planned fiscal consolidation reduces the budget gap to 4.3% from the current 4.4% of GDP.
Economic growth is seen at 7.4% in the current financial year, with inflation likely near 2%.
Moody's retained long-term sovereign ratings and a stable outlook last year, citing sustained economic strength and reliable domestic funding.

Risks

The fiscal deficit remains wider than pre-Covid levels, which could limit improvement in sovereign credit metrics - impacts sovereign debt markets and fiscal policy credibility.
Current fiscal metrics have not improved sufficiently to prompt a change in Moody's assessment, creating uncertainty for investors tracking sovereign ratings - impacts fixed income and sovereign bond sectors.
Reliance on domestic funding for budget deficits, while noted as reliable, underscores vulnerability if domestic conditions shift - impacts banking sector and domestic capital markets.

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