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The Union Government has shifted its focus from fiscal deficits to the "debt-GDP ratio".

Government’s new fiscal anchor

The Union government will adopt the debt-to-GDP ratio as its fiscal anchor starting from the 2026-27 financial year.

The Union government’s debt-to-GDP ratio is estimated at 57.1% in 2024-25 (revised estimate) and 56.1% in 2025-26. The government plans to bring it down to 50±1% by 2031, aligning with global fiscal standards.

Why is government shifting from fiscal deficit to debt-to-GDP ratio as a fiscal anchor?

The debt-to-GDP ratio provides a more comprehensive measure of fiscal health by capturing the cumulative impact of past and current fiscal decisions.

It provides greater operational flexibility to respond to unforeseen developments while ensuring fiscal transparency and sustainability.

How does this shift align with the government’s fiscal transparency efforts?

The government emphasizes proper disclosure of off-budget borrowings, which aligns with the debt-to-GDP ratio as a fiscal anchor. This approach ensures transparency and helps rebuild fiscal buffers for growth-enhancing expenditures.

What are the fiscal deficit targets for the coming years?

The fiscal deficit is estimated at 4.8% of GDP in 2024-25 (revised estimate) and 4.4% in 2025-26. The government aims to gradually reduce it as part of its fiscal consolidation strategy.

What are the three degrees of fiscal consolidation outlined in the budget?

The government has detailed three scenarios:

• Mild consolidation: Targets a debt-to-GDP ratio of 52.0% by FY31 with a 10% nominal growth rate.
• Moderate consolidation: Aims for 50.6% by FY31 with a 10% nominal growth rate.
• High consolidation: Targets 49.3% by FY31 with a 10% nominal growth rate.
• These targets adjust with higher nominal growth rates of 10.5% and 11%.

How does this approach compare to the FRBM Act targets?

The Fiscal responsibility and Budget Management (FRBM) Act targets a 40% debt-to-GDP ratio and a 3% fiscal deficit. However, the current strategy will take several years to achieve these levels. For example, under moderate consolidation, the debt-to-GDP ratio will remain above 40%, and the fiscal deficit will stay above 3% until FY31.

What challenges does this fiscal strategy pose for the private sector?

High government borrowing, combined with state government deficits, leaves limited room for private sector borrowing. This could force private firms to borrow more from abroad, potentially pushing the current account deficit above sustainable levels.

How does the government plan to balance growth and fiscal consolidation?

The government aims to balance growth and consolidation by adopting a flexible fiscal targeting approach. This allows for growth-enhancing expenditures while gradually reducing the debt-to-GDP ratio through mild, moderate, or high consolidation paths, depending on nominal GDP growth rates.

What is the long-term goal of this fiscal strategy?

The long-term goal is to place the central government’s debt on a sustainable and transparent trajectory. By targeting a declining debt-to-GDP ratio, the government aims to rebuild fiscal buffers, ensure macroeconomic stability, and support long-term economic growth.

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Source: 

INDIAN EXPRESS