India's Fiscal Focus: Budget Targets and Economic Growth

India's recent budget aligns with the government's goal to reduce the fiscal deficit despite a coalition's complexities, maintains high public capital expenditure, and projects a decrease in deficit targets. Fitch Ratings approves the measures while highlighting sustained fiscal credibility.

India's newly unveiled post-election budget demonstrates the current administration's commitment to curbing the fiscal deficit, as confirmed by Fitch Ratings. Despite facing coalition pressures, the government is set on economic growth through substantial public capital expenditure, ensuring continuity in critical development areas, Fitch asserted on Friday.

On Tuesday, Finance Minister Nirmala Sitharaman announced a reduction in the central government's fiscal deficit target for 2024-25 to 4.9% of GDP, down from February's interim 5.1% forecast. This is notably lower than the 5.4% anticipated by Fitch when it affirmed India's stable outlook in January 2024.

The revised deficit goal is partially fueled by a significant dividend from the Reserve Bank of India (RBI) received in May. Fitch maintains that the 10.5% nominal GDP growth predicted for 2024-25 is below current forecasts, and the aspiration to lower the deficit to below 4.5% of GDP by 2025-26 is achievable.

India's track record of meeting or exceeding budget deficit targets has fortified its fiscal credibility. The 2023-24 deficit was 5.6% of GDP, outperforming the initial target of 5.9%. The central government aims to reduce this further to below 4.5% of GDP by 2025-26, with RBI dividends bolstering fiscal consolidation over additional spending.

For 2024-25, the capital expenditure target remains at Rs 11.11 lakh crore, representing 3.4% of GDP, unchanged from the interim budget. In 2023-24, the government increased capex by 33% to Rs 10 lakh crore, forming 3.3% of GDP, underscoring an 11.11% raise for the next fiscal year.