Moody's Ratings Forecasts Stable Government Debt Amid Fiscal Consolidation

Moody's Ratings projects general government debt to stabilize above 80% of GDP over the next three years, down from 89.3% in 2020-21. The Union Budget 2024-25 maintains a fiscal consolidation path, with a deficit target of 4.9% for this year, supported by higher GST and direct tax collections and RBI dividends.

Moody's Ratings on Tuesday projected general government debt to stabilize above 80 per cent of GDP over the next three years, down from 89.3 per cent in 2020-21.

General government interest payments are expected to fall to around 24 per cent of general government revenue over the next two years from more than 28 per cent in fiscal 2020-21. This, however, remains significantly higher than the median of 8.7 per cent for Baa-rated peers, noted Moody's Ratings Associate Managing Director Gene Fang in a post-budget assessment. The Union Budget for fiscal 2024-25 continues the fiscal consolidation trajectory set in the interim budget, aiming for a fiscal deficit target of 4.9 per cent this year and 4.5 per cent next year.

Higher gross GST and direct tax collections are expected to fuel revenue growth in the current fiscal. An unexpectedly robust dividend payout from the Reserve Bank of India (RBI) has provided additional fiscal space, though future dividends will be contingent on market conditions, Fang added.

Policy continuity is evident in the government's capital expenditure on infrastructure, which remains around 23 per cent of total spending, although this is slightly below the 24 per cent allocated for interest payments.

"Overall, the budget is credit positive as it is expected to keep fiscal deficits at approximately 4.9 per cent of GDP, lower than the interim budget's 5.1 per cent. This aligns with the government's objective of reducing the fiscal deficit to 4.5 per cent by fiscal 2025-26," Fang concluded.

In absolute terms, the fiscal deficit has decreased to Rs 16.14 lakh crore, compared to the previously estimated Rs 16.85 lakh crore for the current financial year.

(With inputs from agencies.)