Wider fiscal deficits and a more gradual pace of consolidation will lift the Indian government's debt and pressure its sovereign ratings, Fitch Ratings said, cautioning that the fiscal firepower is limited due to a high debt ratio.
Finance Minister Nirmala Sitharaman said the current year fiscal deficit will touch 9.5% of GDP, much higher than the budgeted 3.5% and sharply above analyst estimates of around 7%.
The government has also projected a deficit of 6.5% for the next fiscal year starting April and said it would reach 4.5% only by fiscal 2025/26.
"Deficit targets presented in India's central government budget on February 1 are higher, and medium-term consolidation more gradual, than we expected," Jeremy Zook, director Fitch Ratings' Asia-Pacific Sovereigns team said in a note on Tuesday.
Fitch had placed India's "BBB-" rating on a negative outlook in June 2020 due to the pandemic's impact on growth prospects and the challenges of the high debt burden.
Zook said the government's prioritisation of support towards healthcare and economic recovery is understandable but there is very little fiscal space given the country's high public debt ratio even prior to the virus shock.
The public debt to GDP ratio stands at around 90% for India compared to a 53% median for "BBB" rated economies.
The rating agency said though revenue and economic assumptions made in the budget are "largely credible", the disinvestment target at over three times of what was achieved in 2020/21, appears optimistic.
India plans to raise Rs 1.75 trillion from selling its stake in state run companies and banks.
Fitch said higher infrastructure and expenditure will support near-term recovery alongside falling coronavirus cases and the vaccine rollout, and possibly reduce longer-term economic scarring.
"We believe the previously legislated labour market and agricultural reforms are potentially positive for the medium-term growth outlook, though they clearly face implementation risks," Zook said.
"Signs of a weaker-than-anticipated economic recovery or a reassessment of medium-term growth potential would make it more challenging to achieve a downward trend in the debt ratio under our forecasts and add to pressure on the rating," he added.