Global credit rating agencies such as S&P Global Ratings, Moody’s Ratings and Fitch Ratings expect the Indian government to avoid aggressive cuts to spending or borrowing in the upcoming Union Budget for 2026–27. Instead, they believe the government will keep enough financial flexibility to support the economy, especially in the face of global challenges like higher US import tariffs.
Senior executives from these agencies said India is likely to continue with a slow and steady reduction in its fiscal deficit, rather than sharp consolidation. This approach is seen as necessary to protect growth amid uncertainty in global trade and external demand.
Gradual Fiscal Discipline, Not Sharp Cuts
According to S&P’s Asia sovereign ratings head, YeeFarn Phua, the base expectation is gradual fiscal consolidation. In simple terms, the government is expected to reduce its deficit slowly over time, rather than rushing to cut spending or raise taxes.
Fitch Ratings’ Jeremy Zook expects the government to set a fiscal deficit target of around 4.2% of GDP for FY27, slightly lower than the estimated 4.4% in the current year. This would continue the progress made since the pandemic, when the deficit had shot up to 9.2% of GDP in FY21.
India’s overall debt burden is also expected to ease gradually, falling to about 56% of GDP, down from nearly 59% a few years ago.
Government Spending May See Some Trimming
Rating agencies believe that part of the effort to reduce the deficit could come from lower capital expenditure, or government spending on big infrastructure projects. Fitch noted that public investment may have already peaked and could slow slightly in the coming years.
Nominal Growth a Key Concern
While India’s economy is growing strongly in real terms, agencies flagged slow nominal growth (growth including inflation) as a concern. Nominal GDP growth is estimated at around 8%, the lowest in five years, due to low inflation.
Experts warned that unless nominal growth returns to above 10%, it will be harder for the government to significantly reduce its debt-to-GDP ratio, since debt levels are measured against nominal GDP.
Reforms Could Boost India’s Ratings
The agencies said that reforms, especially steps to reduce regulations and improve tax collections, would be positive for India’s credit ratings. On the other hand, moving away from the recent path of fiscal discipline in a way that weakens government finances could hurt ratings.
S&P upgraded India’s sovereign rating last year to BBB, citing economic resilience and fiscal discipline. Moody’s and Fitch, however, continue to rate India at the lowest investment-grade level, though all three agencies maintain a stable outlook.
Growth Outlook Remains Strong
Despite global risks, all three agencies expect India to remain the fastest-growing major economy in the world over the next two years. Growth estimates range between 6.4% and 7.4%, driven mainly by strong domestic consumption.
US Tariffs: A Manageable Risk for Now
The agencies believe US tariffs pose a medium-term risk, but not an immediate threat. Some of India’s key exports—such as pharmaceuticals and electronics—are relatively protected, and India is also expanding trade ties with other countries.
However, Fitch warned that prolonged high tariffs could create uncertainty for businesses and make India slightly less attractive for foreign investment, especially if other Asian countries secure better trade terms.
Overall, rating agencies see India balancing growth support and fiscal discipline in Budget 2026, while keeping reforms and global risks firmly in focus.
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