India's medium-term fiscal consolidation is expected to become more challenging with the formation of a new coalition government, according to a report from Reuters citing an analyst at credit rating agency Fitch.

Fiscal consolidation, which involves reducing the government's fiscal deficit and debt, is a key factor for credit rating agencies when considering rating upgrades or downgrades. The recent parliamentary elections resulted in Prime Minister Narendra Modi's Bharatiya Janata Party (BJP) failing to secure a majority, leading to a reliance on regional parties for government formation.

Jeremy Zook, director of Asia-Pacific sovereigns at Fitch, highlighted the uncertainty surrounding India's fiscal path. "Our expectation is that the government will look to achieve the 4.5% fiscal deficit target by 2025-26," Zook told Reuters. "Beyond FY26, we have little clarity on where the medium-term fiscal path will go," he added.

Finance Minister Nirmala Sitharaman had previously reduced the fiscal deficit to 5.8% from an earlier forecast of 5.9% of gross domestic product (GDP). She also set a target of 5.1% for the next fiscal year, aiming to bring the fiscal deficit below 4.5% of GDP by 2025-26, according to an article by the Economic Times.

The lower fiscal deficit target for the financial year 2024-25 was based on expectations of strong tax collections and relatively lower spending on subsidies. However, the new coalition government's ability to navigate these targets remains uncertain, adding complexity to India's fiscal consolidation efforts.