India's Budget 2026 'tactical', not 'breakthrough', Moody's Ratings says

India's annual federal budget was "tactical" but ⁠not a "breakthrough", Moody's Ratings said in its reaction to a government roadmap for the next financial year.

Planned fiscal consolidation, which will bring the budget gap to 4.3% from 4.4% in the current year, will not change India's credit profile, Christian de Guzman, senior ‌vice president at Moody's ‌Ratings, told Reuters. "(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 said.

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"We haven't seen the fiscal metrics improve sufficiently enough to actually change the credit profile," he said.

The economy is forecast to grow 7.4% in the current financial year, with inflation likely to be near 2%. The fiscal deficit for the year is set to be 4.4% of gross domestic product.

Moody's Ratings last year affirmed its long-term local and foreign-currency sovereign ratings for India and retained its "stable" outlook, citing sustained strength in its economy and reliable domestic funding for its budget deficits.

India's annual ‌budget, presented by ‍Finance Minister Nirmala Sitharaman on Sunday, made a fresh bet on the country's manufacturing sector ‍as the government seeks to bolster growth in Asia's third-biggest economy amid ‌a volatile global environment.

The planned reforms along with India's free trade agreement with the EU, signed last week, are a positive for the manufacturing sector but may not be enough to meet its ambitions, Guzman said.

The Modi government has been aiming to raise manufacturing from the current level of under 20% of GDP to 25% to generate jobs for the millions entering the nation's workforce each year.

Tax reforms hurting government revenue

The budget comes on the heels of New Delhi's consumption and income tax cuts announced ‍last year.

The government's tax reforms will weigh on revenue growth with tax revenue projected to go down by 0.2 percentage point next fiscal year compared to the current year ‍estimates, Guzman said.

Large government ⁠borrowings have pushed up bond ⁠yields to near one-year highs, hampering its ability to boost spending.

The government's plan to borrow 17.2 trillion rupees ($187.63 billion) in the new fiscal year could crowd out private investments and contribute to a structurally high-interest environment, Guzman said.

"For the next fiscal year, the ratio of interest payments to revenue is actually set to worsen and I think that largely reflects lack of significant progress on debt reduction, but also a narrowing of the revenue base," Guzman said.

The government will cut its debt-to-GDP ratio to 55.6% from 56.1% in the current year. Starting this year, the government has adopted debt-to-GDP as the target for fiscal policy.