Budget to shift focus to debt-to-GDP ratio as key fiscal anchor

The upcoming Union Budget is expected to place greater emphasis on reducing India’s debt-to-GDP ratio rather than targeting a fixed fiscal deficit number, signalling a shift in the government’s approach to fiscal consolidation as it nears the end of the glide path set out under the Fiscal Responsibility and Budget Management (FRBM) framework.

With the debt-to-GDP ratio currently estimated at around 56 per cent, policymakers are increasingly viewing debt levels as a more meaningful measure of fiscal health. A fiscal deficit in the range of 3 to 4 per cent of GDP is generally regarded as manageable for a fast-growing developing economy such as India, balancing growth needs with financial stability.

Under the revised FRBM Act, the fiscal deficit target for 2025–26 was set at below 4.5 per cent of GDP. As this milestone approaches, the Union government has outlined a new medium-term strategy that uses the debt-to-GDP ratio as the primary fiscal anchor.

The roadmap for the next six years was detailed in the FRBM statement released on 1 February 2025. In her Budget speech in July 2024, Finance Minister Nirmala Sitharaman said the fiscal consolidation strategy announced in 2021 had delivered positive outcomes and reaffirmed the government’s commitment to bringing the deficit below 4.5 per cent in the following year.

From 2026–27 onwards, Sitharaman said the government’s objective would be to manage annual fiscal deficits in a manner that ensures central government debt steadily declines as a share of GDP.

Officials argue that this approach allows for greater flexibility than rigid year-on-year deficit targets, while offering a clearer picture of the cumulative impact of fiscal decisions over time. The shift is also expected to help rebuild fiscal buffers and create room for higher growth-oriented spending.

The FRBM statement said the choice of debt as the fiscal anchor complements the government’s push for greater transparency, particularly through improved disclosure of off-budget borrowings.

For the period from 2026–27 to 2030–31, the government said multiple fiscal scenarios could be assessed based on growth assumptions and varying degrees of fiscal adjustment.

Barring major external economic shocks, the government aims to keep annual fiscal deficits aligned with a declining debt trajectory, with the goal of bringing the debt-to-GDP ratio down to about 50 per cent, plus or minus one percentage point, by 31 March 2031 — the final year of the 16th Finance Commission cycle.

With PTI inputs