The Aryavarth Express
Agency (New Delhi): A consistent reduction in India’s fiscal deficit, particularly through sustainable revenue-raising reforms, would positively impact the country’s sovereign rating fundamentals over the medium term, Fitch Ratings stated in a note on Monday.
Fitch highlighted that the Reserve Bank of India’s (RBI) unexpected large surplus transfer to the government is likely to help meet the fiscal deficit target of 5.1% of GDP for the current fiscal year. This surplus transfer, which amounts to a record 2.11 trillion rupees ($25.40 billion) for fiscal 2024, exceeds both analysts’ and government projections.
Fitch suggested that in the upcoming post-election budget, the Indian government might choose to maintain the current deficit target for FY25 or use the windfall to offset unexpected spending increases or lower-than-expected revenue, such as from divestment. In the first scenario, the additional funds could allow for increased infrastructure spending.
“Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1% of GDP. The government’s choice could give greater clarity around its medium-term fiscal priorities,” the note added.
Transfers from the RBI to the government play a significant role in fiscal performance but are influenced by various factors, including the size and performance of assets on the central bank’s balance sheet and the exchange rate. Fitch noted the potential volatility of these transfers, indicating significant uncertainty about their medium-term sustainability.
While the recent surplus transfer provides a short-term fiscal boost, Fitch emphasized that durable revenue-raising reforms are crucial for sustained fiscal deficit reduction and positive long-term impacts on India’s sovereign ratings.
As India navigates its fiscal policies post-election, the government’s approach to utilizing the surplus and managing the fiscal deficit will be critical in shaping the country’s economic stability and credit ratings.
