{"id":85266,"date":"2026-02-01T10:40:43","date_gmt":"2026-02-01T05:10:43","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=85266"},"modified":"2026-02-02T11:38:18","modified_gmt":"2026-02-02T06:08:18","slug":"shifting-the-fiscal-anchor-indias-move-from-fiscal-deficit-to-debt-to-gdp-ratio","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/shifting-the-fiscal-anchor-indias-move-from-fiscal-deficit-to-debt-to-gdp-ratio\/","title":{"rendered":"Shifting the Fiscal Anchor &#8211; India\u2019s Move from Fiscal Deficit to Debt-to-GDP Ratio"},"content":{"rendered":"<h2 style=\"text-align: justify;\"><b>Debt-to-GDP Ratio Latest News<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">As the Finance Minister prepares to present her <\/span><b>ninth consecutive<\/b><span style=\"font-weight: 400;\"> Union Budget, India\u2019s fiscal framework is poised for a structural transition.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">From FY 2026\u201327, the Centre will operationally shift its<\/span><b> fiscal consolidation<\/b><span style=\"font-weight: 400;\"> target from the fiscal deficit to the debt-to-GDP ratio, aligning India\u2019s approach with global best practices.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This Budget will, for the first time, spell out the fine print of this new fiscal anchor for a full financial year.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Expected Changes<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Shift<\/b><span style=\"font-weight: 400;\">: From earlier anchor of annual fiscal deficit target to the new anchor of medium-term debt-to-GDP ratio.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Rationale: <\/b><span style=\"font-weight: 400;\">It provides greater flexibility to respond to economic shocks, enables gradual fiscal consolidation, and creates space for growth- and development-enhancing expenditure.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Key Projections and Targets (Debt Trajectory)<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Centre has projected the debt-to-GDP ratio to decline to 50\u00b11% by March 2031 from an estimated 56.1% in March 2026.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Most economists estimate the Centre to peg it at 55% of the GDP for FY27 in the Budget.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Achieving this trajectory implies a steady annual reduction of ~1 percentage point in the debt ratio.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Fiscal Deficit Implications<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">A one percentage point reduction in the ratio every year would translate into a fiscal deficit of 4.2% of GDP in FY27.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Even at this level, gross borrowings remain high due to &#8211;<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Large repayment obligations.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Future liabilities such as implementation of the <\/span><b>8th Pay Commission.<\/b><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Role of Growth and Borrowings<\/b><\/h2>\n<ul>\n<li aria-level=\"1\"><b>Determinants of Debt-to-GDP ratio:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">Nominal GDP growth (denominator effect)<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Government borrowing and repayment profile<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Interest costs (likely to ease with softer monetary conditions)<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Debt sustainability<\/b><span style=\"font-weight: 400;\">: Improves faster with higher nominal growth even if fiscal deficits remain moderate.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Economic Survey 2025-26 &#8211; Validation of the Strategy<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India has reduced general government debt by around 7.1 percentage points since 2020.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This is achieved while sustaining high public capital expenditure.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Survey endorses 50 \u00b1 1% debt-to-GDP as a credible medium-term policy anchor.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>General Government Debt and States\u2019 Role<\/b><\/h2>\n<ul>\n<li aria-level=\"1\"><b>Why States matter:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">General government debt, which refers to the debt of both states and the Centre, is the metric observed by global rating agencies to assess the fiscal health of the country.\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">While the Centre will detail its fiscal numbers linked to the debt-to-GDP ratio, the role of states in managing their public finances is seen facing greater scrutiny, as they account for a large share of total public debt.<\/span><\/li>\n<\/ul>\n<\/li>\n<li aria-level=\"1\"><b>Emerging view:<\/b>\n<ul>\n<li><span style=\"font-weight: 400;\">States may need explicit, medium-term debt-to-GSDP glide paths.<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Focus should shift from annual deficit targets to scenario-based debt trajectories.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Finance Commission and Federal Fiscal Architecture<\/b><\/h2>\n<ul>\n<li><span style=\"font-weight: 400;\">While the 16th Finance Commission recommendations (FY 2026\u201327 to 2030\u201331) are awaited, it will clarify &#8211;<\/span>\n<ul>\n<li><b>Tax devolution<\/b><\/li>\n<li><span style=\"font-weight: 400;\">Revenue-sharing mechanisms<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Possible fiscal parameters for states<\/span><\/li>\n<\/ul>\n<\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">CEA V Anantha Nageswaran emphasised:<\/span>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Need for empirical work and scenario analysis.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"2\"><span style=\"font-weight: 400;\">Avoid premature decisions on a uniform fiscal metric for states.<\/span><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>RBI\u2019s Concerns on State Finances<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">RBI warns that high debt <\/span><b>crowds out<\/b><span style=\"font-weight: 400;\"> investment and growth.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>For example<\/b><span style=\"font-weight: 400;\">, while the debt of all states put together had declined to 28.1% of GDP by March 2024 from a peak of 31% as of March 2021, the figure is expected to rise to 29.2% by the end of the current fiscal.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">RBI urges highly leveraged states to adopt clear debt consolidation glide paths.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Rising State Borrowings<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">States\u2019 borrowings have risen significantly in the last two decades.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>For example<\/b><span style=\"font-weight: 400;\">, in the first half of the current fiscal, states borrowed 21% more compared to the same period of 2024-25 and are slated to borrow Rs 5 lakh crore in the current quarter that ends on March 31.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Historical context: <\/b><span style=\"font-weight: 400;\">Debt surge during 2015\u201320 partly due to UDAY power sector reforms, where states absorbed DISCOM debt.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Centre\u2019s Fiscal Position Going Ahead<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">On the other hand, the Centre is set to meet its commitment to keep the fiscal deficit below <\/span><b>4.5%<\/b><span style=\"font-weight: 400;\"> of the GDP by FY26 despite tax cuts.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Going ahead, while the government will get some fiscal breather with the debt-to-GDP ratio, the headwinds from the recent reductions in income tax and the Goods and Services Tax may weigh on the deficit projection.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>FY27 expectations: <\/b><span style=\"font-weight: 400;\">Debt target (~55% of GDP) and fiscal deficit (4.3\u20134.4% of GDP).<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Challenges and Way Forward<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Managing borrowings<\/b><span style=\"font-weight: 400;\">: For example, high gross borrowings despite lower deficit targets. Institutionalise debt-to-GDP ratio as the primary fiscal anchor.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Ensuring states\u2019 fiscal discipline<\/b><span style=\"font-weight: 400;\">: Without undermining cooperative federalism. Align state fiscal strategies with medium-term debt sustainability.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Balancing<\/b><span style=\"font-weight: 400;\">: Development expenditure with long-term debt sustainability. Use scenario-based fiscal planning rather than rigid annual targets.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Uncertainty<\/b><span style=\"font-weight: 400;\">: From future liabilities (Pay Commissions, welfare commitments). Leverage higher nominal GDP growth and lower interest costs to rebuild buffers. Strengthen Centre\u2013State coordination post 16th Finance Commission.<\/span><\/li>\n<\/ul>\n<h2 style=\"text-align: justify;\"><b>Conclusion<\/b><\/h2>\n<ul style=\"text-align: justify;\">\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">India\u2019s shift from a fiscal deficit-centric framework to a debt-to-GDP-based fiscal anchor marks a maturation of its fiscal policy architecture.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">By prioritising long-term debt sustainability while preserving flexibility for growth-oriented spending, the new framework seeks to balance macroeconomic stability with developmental aspirations.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">However, its success will hinge on <\/span><b>robust nominal growth<\/b><span style=\"font-weight: 400;\">, prudent borrowing, and active participation by states, making cooperative fiscal federalism more critical than ever.<\/span><\/li>\n<\/ul>\n<p style=\"text-align: justify;\"><b>Source:<\/b> <strong><a href=\"https:\/\/indianexpress.com\/article\/business\/economy\/new-debt-gdp-fiscal-anchor-will-likely-open-space-for-higher-capex-10506159\/\" target=\"_blank\" rel=\"nofollow noopener\">IE<\/a><\/strong><\/p>\n","protected":false},"excerpt":{"rendered":"<p>From FY 2026\u201327, the Centre will operationally shift its fiscal consolidation target from the fiscal deficit to the debt-to-GDP ratio.<\/p>\n","protected":false},"author":19,"featured_media":85370,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[18],"tags":[5069,60,22,59],"class_list":{"0":"post-85266","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-mains-current-affairs","8":"tag-debt-to-gdp-ratio","9":"tag-mains-articles","10":"tag-upsc-current-affairs","11":"tag-upsc-mains-current-affairs","12":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/85266","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=85266"}],"version-history":[{"count":4,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/85266\/revisions"}],"predecessor-version":[{"id":85396,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/85266\/revisions\/85396"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/85370"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=85266"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=85266"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=85266"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}