With FY25 fiscal deficit target at 5.1%, FM is gunning for ratings upgrade say experts

• India’s finance minister revises FY24’s fiscal deficit targets to 5.8% of GDP from 5.9% fixed earlier.
• The revenue receipts at ₹30.03 lakh crore for FY24 are expected to be higher than the Budget Estimate.
• Most economists had said that the government is on track to achieve the fiscal deficit target.

The biggest takeaway from the Finance Minister Nirmala Sitharaman’s interim Budget announcement is the government’s fiscal consolidation program. While the current year’s fiscal deficit has been revised to 5.8% of GDP from 5.9% estimated earlier, the big surprise is next year’s target. Finance minister announced that the fiscal deficit target for FY25 was set at 5.1% of GDP.

“The revenue receipts at ₹30.03 lakh crore are expected to be higher than the Budget Estimate, reflecting strong growth momentum and formalization in the economy. The Revised Estimate of the fiscal deficit is 5.8% of GDP, improving on the Budget Estimate, notwithstanding moderation in the nominal growth estimates,” she said in her speech.

She said that the government will continue on the path of fiscal consolidation, to reduce the fiscal deficit below 4.5% by 2025-26. The gross and net market borrowings through dated securities during FY25 are estimated at ₹14.13 and ₹11.75 lakh crore respectively.

“Both will be less than that in 2023-24. Now that the private investments are happening at scale, the lower borrowings by the Central Government will facilitate larger availability of credit for the private sector,” FM added. She also set the FY25’s divestment target at ₹50,000 crore.

Bond markets cheer

The bond markets have been cheering the move. This led to a significant drop in India's 10-year yield by 100 basis points to 7.04%. Experts see further drop in yields due to flows from foreign institutional investors and the government’s move increases its chances of a possible ratings upgrade.

“The finance ministry is clearly aiming for rating upgrade with aggressive fiscal deficit reduction target as we are at investment grade rating,” said Chirag Mehta, CIO of Quantum AMC.

Gaurav Dua, head of capital market strategy, Sharekhan by BNP Paribas too said that the fiscal deficit target of 5.1% for FY25 is good news for the markets. “Bond markets are celebrating the same, with a rally in bond prices and appreciation in INR against USD,” he added.

The government sticking to the path of fiscal consolidation is good news for foreign investors. A few experts had also worried that this pre-election budget would have populist measures. Lack of such measures seems to have enthused the experts.

“The FM is sticking to fiscal responsibility with a lower fiscal deficit which could be music to the ears of foreign investors and impending $25 billion bond inclusion in June as lower budget deficits and pared borrowings will help bring down yields. It could possibly open the door for a ratings upgrade,” said Pradeep Gupta, Co-founder & Vice-chairman, Anand Rathi Group.

As borrowings and liquidity conditions ease, the markets can also expect a possible interest rate cut in the coming financial year.

“Lesser borrowing by the government will be beneficial for the private sector and households as it will put more money on the table for them. It will also pave the way for RBI to start cutting rates sooner compared to other economies,” said Apurva Sheth, head of market perspectives & research at Samco Securities.