Fitch: India’s Debt Reduction Progresses Gradually
Fitch Ratings has observed that India’s efforts to reduce its public debt are progressing at a gradual pace, highlighting potential vulnerabilities in the event of significant economic disruptions. The agency acknowledges the government’s commitment to a medium-term fiscal framework aimed at decreasing the debt-to-GDP ratio, which could positively influence India’s sovereign rating over time.
Debt-to-GDP Reduction Strategy
In the recent FY26 Budget, Finance Minister Nirmala Sitharaman introduced a new fiscal strategy, shifting the focus from fiscal deficit targets to the debt-to-GDP ratio as the primary fiscal anchor. The government’s six-year roadmap aims to reduce the debt-to-GDP ratio from 57.1% in FY25 to a range of 47.5% to 52% by FY31. This approach is designed to provide the government with operational flexibility to address unforeseen economic developments while ensuring a transparent and sustainable debt trajectory.
Fiscal Deficit and Economic Growth
The budget outlines a fiscal deficit target of 4.4% of GDP for FY26, with an assumed nominal GDP growth rate of 10.1%. Achieving the desired debt reduction will require maintaining fiscal deficits at or below this target and is heavily dependent on sustained nominal GDP growth. On a general government basis, which includes both central and state finances, this strategy implies maintaining deficits around 7% of GDP and achieving a debt level in the low 70% range of GDP by FY31.
Balancing Growth and Fiscal Consolidation
Fitch Ratings emphasizes the increasing complexity of balancing growth objectives with fiscal consolidation efforts. The budget is expected to have a neutral impact on economic growth, as the positive effects of tax cuts and continued capital expenditure are likely to offset the contractionary impact of deficit reduction. However, with anticipated moderation in revenue growth, the government may need to exercise expenditure restraint, particularly in capital spending, to keep deficits under control.
Conclusion
While India’s gradual approach to debt reduction reflects a commitment to fiscal discipline, Fitch Ratings cautions that the slow pace leaves the country vulnerable to potential economic shocks. The agency underscores the importance of adhering to the outlined fiscal framework and achieving the projected debt trajectory to enhance India’s sovereign credit profile over time.
