The Fitch Ratings logo is seen at their office.
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Mumbai: A sustained reduction in fiscal deficit, particularly if underpinned by durable revenue-raising reforms, would be a positive for India's sovereign rating fundamentals over the medium term, Fitch Ratings said in a note on Monday.
The Reserve Bank of India's (RBI) larger-than-expected surplus transfer to the government should help ensure that the deficit target of 5.1 per cent of GDP for the current fiscal year will be met and could be used to lower the deficit further, Fitch said.
Last week, the board of India's central bank approved a record surplus transfer of Rs 2.11 trillion ($25.40 billion) to the government for fiscal 2024, sharply above analysts' and government projections.
In its post-election budget, the government could either opt to keep the current deficit target for FY25 or opt to offset upside spending surprises or lower-than-budgeted revenue, for example from divestment, Fitch said.
In the first scenario, the windfall could also allow the authorities to further boost spending on infrastructure, the note said.
"Alternatively, all or part of the windfall could be saved, pushing the deficit to below 5.1 per cent of GDP. The government's choice could give greater clarity around its medium-term fiscal priorities," the note added.
Transfers from the RBI to the government can be significant at the margin for fiscal performance, but depend on various factors, including the size and performance of assets held on the central bank's balance sheet and the exchange rate, Fitch wrote.
"The potential volatility of transfers means there is significant uncertainty about their medium-term path, and we do not anticipate that dividends as a share of GDP will be sustained at such a high level," they said.
($1 = 83.0625 Indian rupees)