S&P Global Ratings has stated that India's sovereign rating could be upgraded within the next 24 months if the government is able to bring down the fiscal deficit to 4% of GDP. The trigger for the upgrade would be the general government deficit, which includes the central and state governments, falling below 7% of GDP, with a significant portion of the reduction driven by the central government. The central government aims to reduce the fiscal deficit to 5.1% of GDP in the current fiscal year, down from 5.63% in 2023-24. S&P had previously upgraded India's outlook to positive in May, while maintaining the rating at 'BBB-'. India has experienced an average growth rate of 8% over the past three years, driven by domestic consumption and infrastructure investment. S&P estimates that India's economic growth will be 6.8% in the current fiscal year, slightly lower than the 8.2% growth in the previous year. India remains the fastest growing economy in the Asia region, and the impact of the COVID-19 pandemic on Asian economies is receding as growth begins to accelerate [1ba7ef6b].
India's economy continues to grow while the fiscal deficit is contracting, making it an attractive destination for foreign fund inflows. The country's central fiscal deficit has decreased from 9% to a projected 5.1% in FY2025, while the economy is still growing at a rate of 6.5-7% in real terms and 10-11% in nominal terms. Finance Minister Nirmala Sitharaman has set targets to further reduce the fiscal deficit to 5.1% of GDP for FY2025 and 4.5% by FY2026 [cea7db39].
Rana Gupta, Senior Portfolio Manager and India Equity Specialist at Manulife Investment Management, believes that India will remain a top candidate for emerging market flows. He expects the US Federal Reserve to initiate a rate cut cycle in June-July, which will further boost India's attractiveness to foreign investors. The market is eagerly awaiting assurance on rate cuts, and the Fed has indicated its willingness to cut rates if the economy slows down. The Federal Open Market Committee (FOMC) recently announced that it would not reduce interest rates until it has greater confidence in inflation moving toward its target rate of 2% [cea7db39].
Gupta's positive outlook on India's economic prospects is supported by the country's strong growth momentum and the government's commitment to fiscal discipline. Despite the challenges posed by inflation and the need to balance economic growth with inflation control, India's fiscal deficit is on a downward trajectory. This, coupled with the ongoing growth of the economy, makes India an attractive destination for foreign fund inflows. The combination of a narrowing fiscal deficit and sustained economic growth bodes well for India's position as an emerging market [cea7db39].
Meanwhile, in Indonesia, the budget deficit is forecasted to increase this year and may widen further as President-elect Prabowo Subianto implements his policy agenda. However, revenue-side reforms could keep the gap under the legislated ceiling of 3% of GDP, according to the World Bank. The deficit is projected to widen to 2.5% of GDP in 2024 from 1.7% in 2023, due to cost-of-living measures and falling commodity prices. It is then expected to hold at 2.5% of GDP in 2025 as Prabowo begins implementing his campaign promises, before narrowing slightly to 2.4% in 2026. Indonesia has laws mandating that the annual budget deficit cannot exceed 3% of GDP, with a maximum debt-to-GDP ratio of 60% [ae1f51e7].
The World Bank also estimated that Indonesia's current account deficit relative to GDP would progressively widen to 0.9% in 2024, 1.4% in 2025, and 1.6% in 2026, from 0.1% in the previous year. Despite these projections, the World Bank forecasted economic growth of 5.0% in 2024, compared to 5.05% in 2023, with further growth expected in 2025 and 2026 [ae1f51e7].
Indonesia's ministers and officials assure that the 2025 budget gap will remain under the legislated ceiling, easing market worries about President-elect Prabowo Subianto's expansionary fiscal policy. The debt-to-GDP ratio is expected to stay below 50%, and Prabowo is committed to fiscal targets set by the current government, including a 2025 fiscal deficit within the range of 2.29% to 2.82% of GDP. The cost of Prabowo's free school meals program is already included in the budget and will not widen the budget gap. Indonesia has laws limiting the annual budget deficit at 3% of GDP and the debt-to-GDP ratio at 60%. The currency and bond prices recovered slightly after the press conference. Bank Indonesia governor Perry Warjiyo sees no need for further rate hikes for now. The World Bank forecasts an increase in Indonesia's budget deficit this year, but revenue-side reforms could keep the gap under the legislated ceiling [5bf94964].