Fitch Ratings stated on Monday that a sustained reduction in India’s fiscal deficit, especially if supported by durable revenue-raising reforms, would positively impact the country’s sovereign rating fundamentals over the medium term. The Reserve Bank of India’s (RBI) larger-than-expected surplus transfer to the government should help meet the deficit target of 5.1 percent of GDP for the current fiscal year and could potentially reduce the deficit further, according to Fitch.
Last week, the board of India’s central bank approved a record surplus transfer of ₹2.11 trillion ($25.40 billion) to the government for fiscal 2024, significantly exceeding analysts’ and government projections.
In its post-election budget, the government might either maintain the current deficit target for FY25 or address any unexpected spending increases or lower-than-anticipated revenue, such as from divestments, Fitch suggested. In the first scenario, the windfall could also enable increased infrastructure spending.
“Alternatively, all or part of the windfall could be saved, reducing the deficit to below 5.1 percent of GDP. The government’s decision could provide greater clarity on its medium-term fiscal priorities,” the note added.
Transfers from the RBI to the government can significantly impact fiscal performance but depend on various factors, including the size and performance of assets on the central bank’s balance sheet and the exchange rate, Fitch noted.
“The potential volatility of transfers means there is significant uncertainty about their medium-term trajectory, and we do not expect dividends as a share of GDP to remain at such a high level,” Fitch concluded.