Budget signals slowing pace of fiscal consolidation, Moody’s says

India’s deficit target for FY26 is within its grasp though the budget signals a slowing pace of fiscal consolidation as the government firms up support for economic growth “against a dampened macroeconomic backdrop,” Moody’s Analytics said on Tuesday.

Infrastructure development continues to be a key focus area for the government, which aims to accelerate growth and invigorate private sector investments in the economy, Moody’s said in its report.

“The capital outlay for highways and railways remains high,” Moody’s said, while adding that to meet energy-transition and net-zero objectives, “the government aims to have 100 gigawatts (GW) of nuclear power capacity by 2047, with private sector participation.”

Retail credit has been the mainstay for overall credit expansion in the past few years. While the personal income tax cuts will increase individuals’ disposable income and improve the debt-servicing capacity of this segment, broadening credit access for farmers and small businesses will improve debt affordability, Moody’s said.

The reduction in personal income tax is likely to have positive effects across the wider financial services sector, including insurance.

Increased disposable income among the middle class, the insurance sector’s largest target market, particularly bodes well for health insurance amid growing awareness of well-being and protection in the post-covid era, the report said.

Indian insurers’ total premium revenue rose 16% to ₹9.2 trillion ($77 billion) in the first eight months of fiscal 2024-25, driven by a 21% increase in health insurance and an 18% increase in new business in the life sector. This marks an acceleration from the previous fiscal year, when premiums grew by 8%.

The report said many foreign insurers, already present in India through joint ventures, could seek to increase their ownership stakes following regulatory changes.

“We view foreign investment as credit positive, as it enhances product innovation and brings benefits in capital adequacy, financial flexibility, and governance standards,” the report added.

The budget for fiscal 2025-26 indicates a shift in government policy from fiscal consolidation to reinforcing growth, bolstering the already favorable growth prospects of the Indian insurance industry.

Moody’s noted that the current fiscal budget reflects a slower pace of fiscal consolidation as the government aims to provide stronger support for economic growth amid a challenging macroeconomic environment.

The government targets a central deficit of 4.4% of GDP for fiscal 2025-26, which is 0.4% lower than the revised estimate for fiscal 2024-25 and represents half the pace of reduction seen in the past two fiscal years, it added.