India’s fiscal consolidation has actually gathered momentum in the last few years, thanks to robust growth, fiscal marksmanship and focus on improving the quality of fiscal spending. There’s scope for FY25 fiscal deficit to end this year lower at 4.8% of GDP (vs BE of 4.9%), given that net tax collection is running at a far higher rate vs BE. If this were to happen, then the FY26 fiscal deficit target would fall below 4.5%, maybe 4.3-4.4%.
To ascertain the medium-term fiscal outlook, a debt sustainability exercise for the economy provides a reference point for the progress likely under the baseline scenario. A high economic growth rate and fiscal consolidation could lead to sustained improvement in India’s debt-GDP ratio over the medium term.
In fact, India could lower its debt-GDP to below 75% of GDP by FY31, even with a consolidated general budget deficit amounting to 6.7%, provided nominal GDP growth averages 10.5-11% during the forecasting period. Barring some unforeseen shocks, a 10.5-11% nominal GDP growth assumption is realistic, based as it is on an average 6.5% real GDP growth and 4-4.5% inflation over the forecasting period.
India’s short- and medium-term macro outlook remains bright, with the likelihood of sustained strong growth outperformance amid anchored inflation, positive real rates, continued fiscal consolidation, healthy external and domestic financial sector, and expected macro dividend from ongoing supply-side reforms. India should become a $7 tn economy by 2030, and the third largest by size by 2027. Its per-capita income will likely double to $4,500 by the end of this decade.
Public debt-GDP is likely to be in a sustained downward trend due to a positive growth-interest differential. There is little risk associated with public debt funding, as bulk of debt is in domestic currency.Given this macro backdrop, India stands a good chance of getting a rating upgrade soon. In the chapter, ‘Does India’s Sovereign Credit Rating Reflect its Fundamentals? No!’ Economic Survey 2020-21 noted that ‘never in the history of sovereign credit ratings, has the fifth largest economy in the world been rated at the lowest rung of the investment grade (BBB-/Baa3) except in the case of China and India. Reflecting on the economic size and, thereby, ability to repay debt, at all other times, the fifth largest economy has been predominantly rated AAA.’The survey further pointed out that India’s sovereign credit ratings ‘do not reflect its fundamentals’, and called for the credit ratings methodology to be made ‘more transparent, less subjective and better attuned to reflect economies’ fundamentals’.
In 2020-21, India’s public sector debt-GDP peaked at 87.8% in the immediate aftermath of the pandemic. Since then, aided by robust growth and disciplined fiscal consolidation, public sector debt-GDP has moderated close to 81% by FY24, and is likely to reduce further to 74.8% by FY31 (2030). This is lower than IMF’s estimate, which sees India’s public sector debt-GDP moderating to 78.2% by 2030.
Our projection of public sector debt-GDP at 74.8% by 2030 is closer and comparable to RBI’s forecast of 73.4% over the same forecasting horizon. If growth continues to surprise to the upside, compared to the conservative 6.5% average estimate, and the general government deficit falls lower than the assumed 6.7% of GDP trough during the forecasting horizon, then there is a fair chance of India’s debt-GDP falling closer to 70%.
In July, Shaktikanta Das said that a credit rating upgrade for India was long overdue, given the country’s robust economic health. One can’t agree more. In fact, going by the ‘adequate payment capacity’ interpretation of the credit rating scale, India probably deserves a sovereign credit rating two notches above its current level.