Budget 2025: Medium-Term Debt Reduction Target Positive, Can Improve Credit Profile Over Time, Says Fitch

India’s 2025 Union Budget signals the government’s intention to stay on a path of gradual but steady deficit reduction, global ratings agency Fitch said in a release on Tuesday.

"We view the government’s clarification of medium-term debt reduction targets as a positive development that, if adhered to, could improve the credit profile over time and eventually lead to upward pressure on India’s rating," it said.

The government aims to maintain central government debt on a gradual downward trend, reaching close to 50% of gross domestic product by fiscal 2031, roughly 7 percentage points lower than in fiscal 2025. The focus on medium-term debt target should give greater flexibility to manage fiscal deficit, depending on economic conditions, Fitch said.

"We believe such a path would require fiscal deficits to be sustained at or just below the 4.4% GDP deficit target in FY26 on average," Fitch said. This would imply deficits on the general government balance—which includes the states and is key to the sovereign rating—of around 7% of GDP and debt in the low-70% range of GDP by fiscal 2031, it added.

"These targets could be hard to achieve if nominal GDP growth slips even 1 percentage point below our 10.5% medium-term assumption," Fitch cautioned.

While the projections made in the budget appear realistic, there is a risk of modest slippage in revenue collection targets amid a recent moderation in economic growth, it said.

On growth, the budget will be broadly neutral, Fitch said, continuing to forecast GDP growth of 6.4% for fiscal 2025 and 6.5% for fiscal 2026. "Tax cuts may provide a modest consumption boost, and we expect government capex to remain relatively high, but overall, the fiscal deficit reduction is likely to be slightly contractionary," the note explained.

Fiscal metrics remain weak, with general government deficits, debt and debt service burdens all well above peers, Fitch noted. The budget’s income tax cuts will make it harder to raise the revenue/GDP ratio, which is also low, and it is unclear how sustainable the revenue support from central bank dividends will be, it added.

Moody's also said that although the Indian government remains on track to meet near-term policy goals, the ratings agency does not expect a sufficient improvement in the debt burden. It is also not expecting the proportion of the budget earmarked for debt servicing to change its broader assessment that India’s fiscal strength will remain weaker than most of its investment-grade peers.