India’s Budget Balances Growth and Fiscal Consolidation Well
Following the parliamentary elections earlier this year, the Indian Finance Minister presented the first budget of the new coalition government today. In our view, the budget does a good job balancing fiscal consolidation objectives while supporting near-term growth and facilitating employment generation. The budget focuses on 9 priority areas, including infrastructure, inclusive development, productivity enhancement in agriculture, and employment and skilling. While outlays are increasing on employment
schemes and transfers to the states governed by key allies of the BJP-led coalition, the government deepened its revenue base by raising the tax rate on short- and long-term capital gains as well as on security transactions taxes on derivative trading. This coupled with higher dividend proceeds from the Reserve Bank of India enabled the government to adhere to its fiscal consolidation path.
Budget Arithmetic is Realistic
The government set a fiscal deficit target of 4.9% of GDP for FY25 (April 2024-May 2025). This is down from last year when the deficit came in at 5.6%, and lower than the 5.1% target set for this year in the Interim Budget. Looking at the budget arithmetic, the deficit target is based on credible macroeconomic assumptions. The budget assumes nominal GDP growth of 10.5%, with overall revenue budgeted to rise by 10.8% and expenditures to increase by 8.5%. With this budget, the government appears wellpositioned to achieve the deficit target it set out in FY22 of 4.5% by FY26.
In addition, the quality of fiscal spending is improving. Building on a trend over the last few years, the budget increases infrastructure expenditure and reduces subsidies. India’s budgetary allocations to capital expenditure nearly doubled from 1.6% of GDP in FY19 to 3.4% of GDP in FY25. We see this as credit positive as it bodes well for medium-term growth.
Continuation of Macro and Fiscal Trends Are Key to India’s Credit Rating
India’s credit rating (BBB (low), Positive Trend) reflects India’s public finance challenges, but at the same time the economy’s high growth potential. The cumulative and ongoing benefits of India’s structural reform efforts look likely to lift India’s potential growth rate with the IMF expecting India to remain amongst the fastest growing major economies in 2024-25. That said, India’s fiscal deficits at the center and state level – and level of government debt are higher than its peers in the BBB rating range and remain a key credit weakness. With this budget, the Indian government strikes a good balance: demonstrating a commitment to fiscal consolidation while supporting medium-term growth.
