MUMBAI: The Indian federal government’s aim to achieve a fiscal deficit target of 4.5% of gross domestic product (GDP) by 2025/26 could see some risks, an analyst at Moody’s Investors Service said on Wednesday.

“The current pattern suggests that perhaps there could be some upward pressure on expenditure, especially if they (government) continue with this focus on capex,” Christian de Guzman, the rating agency’s senior vice president, told Reuters.

The government’s budget gap, which hit a high of 9.5% of GDP in 2020/21 as the spread of COVID-19 infections brought the economy to a halt, has since narrowed but remains well above the medium-term goal of 4.5% of GDP by 2025/26.

India’s federal government will target a budget deficit of 5.9% of GDP for 2023/24, Finance Minister Nirmala Sitharaman said in her budget speech.

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Earlier in a statement, Moody’s said the narrower fiscal deficit underscores the government’s commitment to longer-term fiscal sustainability.

The rating agency added that the country’s high debt burden and weak debt affordability remain key constraints that offset its fundamental strengths.

On the budget presented for 2023/24, Guzman said there was some credibility in terms of the revenue and expenditure targets. There is some greater efficiency in tax collections, he added, and that could support the government’s revenue.

The underlying strength of the economy is helping push the government’s revenue buoyancy, Guzman said, estimating India’s real GDP growth would decelerate to 5.6% in 2023/24 from 7% in this fiscal.

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India’s sovereign rating balances out the strengths and the weaknesses, Guzman said, explaining why the rating agency has a ‘stable’ outlook and a Baa3 rating on the country.

These strengths, according to Guzman, continue to reflect the “very large and fast-growing economy as well as the stable and domestic finance financing base for the government’s large debt.”

Moody’s pegs India’s debt-to-GDP ratio at 85% for 2023/24.

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