India’s 2025 Budget: Deficit Reduction & Growth

India’s Budget Aims for Steady Deficit Reduction

India’s 2025 Union Budget shows the government’s plan to slowly but steadily reduce the deficit, according to a global ratings agency, Fitch. This budget update provides important [[clarification]] on the country’s medium-term debt reduction goals. This is a good sign and could improve India’s credit profile over time, potentially leading to a better rating.

Focus on Medium-Term Debt Target

The government wants to bring down central government debt gradually, aiming for it to be close to 50% of the gross domestic product (GDP) by fiscal year 2031. This is about 7 percentage points lower than the levels expected in fiscal year 2025. Focusing on this medium-term debt target gives the government more flexibility to manage the fiscal deficit depending on how the economy is doing.

Fiscal Deficit Projections

To achieve this, the fiscal deficit needs to be maintained at or just below 4.4% of GDP on average in FY26. This translates to a general government deficit (which includes the states) of around 7% of GDP and debt in the low-70% range of GDP by fiscal year 2031. However, these targets could be difficult to reach if nominal GDP growth falls even slightly below the projected 10.5% medium-term assumption.

Growth and Revenue Projections

While the budget projections seem [[realistic]], there’s a chance that revenue collection targets might be missed slightly because of a recent slowdown in economic growth. The budget is expected to be generally neutral in terms of its effect on growth, with GDP growth projected to be 6.4% for fiscal year 2025 and 6.5% for fiscal year 2026. Tax cuts might boost consumption a bit, and government capital expenditure is expected to stay high, but overall, the plan to reduce the fiscal deficit is likely to slow things down somewhat.

Challenges and Risks

India’s fiscal metrics remain weak. Government deficits, debt, and debt service burdens are much higher than similar countries. The income tax cuts in the budget make it harder to increase the revenue-to-GDP ratio, which is also low. Also, it’s not certain whether the revenue coming from central bank dividends will continue at the same level in the future. Moody’s also does not expect a significant change in India’s debt burden, which may affect its fiscal strength. Despite the government being on track to meet short-term policy objectives, long-term improvement in fiscal strength is still questionable.

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