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Ratings agency Fitch on Monday said that India's Budget FY23 points to a slower fiscal deficit reduction.

The Central government plans to reduce the fiscal deficit to 4.5 per cent of the GDP by FY26.In the Union Budget, the Centre has revised the fiscal deficit to 6.9 per cent of the GDP for FY22. The deficit target for FY23 has been kept at 6.4 per cent of the GDP.

"The higher deficits and continued lack of clarity on medium-term consolidation plans in India's latest budget add risks to Fitch Ratings' projection of a downward trajectory in government debt/GDP," Fitch Ratings said.

"The degree to which planned higher capex supports GDP growth and offsets these risks is an important consideration for the sovereign rating. Risks around the sustainability of the downward debt trajectory were a key factor behind our decision to maintain a 'Negative Outlook' when we affirmed India's 'BBB-' rating in November 2021."

Further, the agency said that deficit targets were slightly higher than its anticipation, when it had affirmed the rating.

"The borrowing allowance for states, which was maintained at 4 per cent of gross state domestic product in FY23, keeping it above the pre-pandemic level of 3 per cent, poses further risk to our fiscal forecasts."

Besides, Fitch pointed out that higher deficit in FY22 reflects greater capex, which is partly to clear Air India's liabilities, as well as increased spending in response to Covid-19 virus outbreaks and shortfalls on divestments.

"Revenue receipts, excluding divestments, were 16 per cent above the targets in last year's budget."

Furthermore, the Centre plans to raise FY23 capex by 24 per cent above the revised FY22 estimates to around 2.9 per cent of GDP.

"The budget sees revenue receipts, excluding divestments, increasing by about 9.6 per cent from revised FY22 estimates and the divestment target is set at Rs 650 billion (0.3 per cent of GDP), against a revised estimate of Rs 780 billion in FY22.

"We believe the budget offers a degree of confidence in the near-term fiscal outlook. The nominal GDP growth target for FY23 of 11.1 per cent looks credible and revenue targets, including those for divestments, are realistic."

The agency noted that Centre appears to be following through on its efforts to improve budget transparency by keeping previously off-budget spending on budget, limiting downside surprises.

"However, there is less clarity around the medium-term outlook. The broad target of reducing the deficit to 4.5 per cent of GDP by FY26 remains, but the budget offered few details on how this will be achieved.

"The higher FY23 deficit also implies significant fiscal tightening between FY24 and FY26 to meet the target. Fiscal consolidation tended to fall short of government goals prior to the pandemic, suggesting risks to the medium-term target and debt trajectory."

In addition, it said that planned acceleration in infrastructure capex will provide a fillip to near- and medium-term growth, if fully implemented. The expected growth, Fitch said, could offset downside risks to real GDP growth forecast, which stands at 10.3 per cent in FY23 and about 7 per cent on average through to FY27.

"We revised the Outlook on India's rating to Negative, from Stable, in June 2020, partly owing to our assumptions about the impact of the pandemic on public finance metrics."

"The government has little fiscal headroom at its current rating level to respond to possible shocks to growth."