Budget signals slowing fiscal consolidation, says Moody's

NEW DELHI: The Budget signals slowing fiscal consolidation as focus shifts to reinforcing growth, global ratings agency Moody's Ratings said on Tuesday but it expects that govt is within reach of its near-term deficit target of 4.5% by fiscal 2025-26.

"Planned cuts to personal income tax rates will bolster middle-class spending power and consumption, which is credit positive for many corporates and the financial sector," the agency said in a note. "However, the resulting foregone revenue will slow the pace of the country's fiscal consolidation even as total spending declines as a share of GDP. The proportion of spending allocated to debt servicing continues to increase," Moody's Ratings said.

It said the increase in exemption limits for income tax will boost disposable income, particularly for urban middle-class households. The agency said that along with easing inflation, higher growth in real income will bolster consumption growth, facilitating a credit-positive recovery for many consumer-facing sectors.

Moody's said in the Budget for the fiscal year ending March 2026 (fiscal 2025-26), govt is targeting a central govt deficit of 4.4% of GDP. This is 0.4 percentage point lower than the revised estimate of 4.8% for fiscal 2024-25 and represents half the pace of the 0.8 percentage-point narrowing recorded in each of the past two fiscal years.

"Nevertheless, the Budget puts govt within reach of its near-term deficit target of 4.5% by fiscal 2025-26, which has guided fiscal policy since 2021," it said.