Moody's Assessment: India's Budget 2026 Tactical Yet Lacks Breakthrough Impact
Global credit rating agency Moody's Ratings has characterized India's Union Budget for the 2026-27 fiscal year as "tactical" but not a "breakthrough," indicating that the planned fiscal consolidation measures are unlikely to alter the country's credit profile significantly. This assessment comes after Finance Minister Nirmala Sitharaman presented her ninth consecutive budget on February 1, 2026, outlining the government's economic roadmap.
Fiscal Consolidation Falls Short of Credit Profile Improvement
Christian de Guzman, Senior Vice President at Moody's Ratings, explained to Reuters that despite India's ongoing efforts in deficit reduction, the fiscal metrics have not improved sufficiently to warrant a change in credit assessment. "Despite India's lengthening track record of deficit consolidation or fiscal discipline, this deficit is still wider than what it was prior to COVID," Guzman stated. "We haven't seen the fiscal metrics improve sufficiently enough to actually change the credit profile."
The budget projects a reduction in the fiscal deficit to 4.3% of GDP for 2026-27, down from 4.4% in the current financial year. However, Moody's views this marginal improvement as insufficient to address broader economic challenges.
Economic Context and Growth Forecasts
India's economy is forecast to grow at 7.4% in the current financial year, with inflation expected to remain near 2%. The fiscal deficit for the year is set at 4.4% of gross domestic product. Moody's had previously maintained India's long-term local and foreign-currency sovereign ratings unchanged with a "stable" outlook, acknowledging the economy's strength and reliable domestic funding for budget deficits.
The Union Budget emphasizes strengthening the manufacturing sector, aiming to increase its share from under 20% to 25% of GDP. This strategic focus is designed to drive growth in Asia's third-largest economy while navigating global volatility and generating employment for millions entering the workforce annually.
Tax Reforms and Borrowing Challenges
Guzman highlighted that recent tax reforms, including consumption and income tax cuts announced last year, will further weigh on revenue growth. Tax collections are projected to decline by 0.2 percentage points in the next fiscal year compared to current estimates.
Simultaneously, large government borrowings have pushed bond yields close to one-year highs, limiting the government's capacity to increase spending. The plan to borrow ₹17.2 trillion in the new fiscal year could crowd out private investments and contribute to a structurally high-interest environment.
"For the next fiscal year, the ratio of interest payments to revenue is actually set to worsen," Guzman noted. "This largely reflects the lack of significant progress on debt reduction, but also a narrowing of the revenue base."
Broader Implications for India's Fiscal Strategy
The Moody's assessment underscores the delicate balance India must maintain between fiscal discipline and economic growth. While the budget demonstrates tactical adjustments, it falls short of delivering transformative measures that could enhance creditworthiness. The agency's comments highlight ongoing concerns about:
- Revenue Base Constraints: Tax reforms impacting collections
- Borrowing Pressures: High government debt limiting fiscal flexibility
- Structural Challenges: Persistent deficits compared to pre-pandemic levels
As India continues its economic expansion, the government's ability to address these fiscal vulnerabilities will be crucial for sustaining long-term growth and improving its credit profile on the global stage.
