What’s in Today’s article?
- Debt-GDP Ratio Latest News
- Debt-GDP Ratio: A New Fiscal Approach
- Rationale for the Shift to Debt-GDP Ratio
- Fiscal Consolidation Strategies: Mild, Moderate, and High Approaches
- Impact on Fiscal Deficit
- Expert Analysis and Concerns
- Conclusion
- India’s Debt-GDP Strategy FAQs
Debt-GDP Ratio Latest News
- In a significant shift in fiscal policy, the Indian government has announced that it will replace the fiscal deficit target with the debt-to-GDP ratio as the primary fiscal anchor from FY 2026-27.
- This move aims to ensure fiscal sustainability, enhance transparency, and provide greater flexibility in managing public finances.
- The government has set a long-term target of reducing the central government’s debt-GDP ratio to 50±1% by March 31, 2031.
Debt-GDP Ratio: A New Fiscal Approach
- The debt-to-GDP ratio measures the share of a country’s national debt in relation to its Gross Domestic Product (GDP).
- It serves as a reliable indicator of fiscal health, capturing both past and present borrowing trends.
- According to the Union Budget 2025, the central government’s debt-GDP ratio is projected to:
- 57.1% in FY 2024-25 (Revised Estimate)
- 56.1% in FY 2025-26
- Declining towards 50% by FY 2031
- The move aligns with global best practices and ensures a long-term fiscal consolidation strategy rather than focusing solely on annual deficit reduction.
Rationale for the Shift to Debt-GDP Ratio
- More Reliable Fiscal Performance Measure: It captures the cumulative effects of past fiscal policies, unlike the annual fiscal deficit target, which provides a short-term snapshot.
- Greater Fiscal Transparency: The new approach aims to reduce off-budget borrowings and improve clarity in public debt reporting.
- Operational Flexibility: It allows the government to respond to economic shocks and unforeseen developments more effectively than rigid annual deficit targets.
- Debt Sustainability and Growth: A structured debt-reduction path will create fiscal space for productive investments in infrastructure, social welfare, and economic development.
Fiscal Consolidation Strategies: Mild, Moderate, and High Approaches
- To achieve the debt-GDP reduction target, the government has outlined three scenarios based on different nominal GDP growth rates:
- This approach allows flexibility in choosing mild, moderate, or aggressive fiscal consolidation, balancing growth needs with debt sustainability.
Impact on Fiscal Deficit
- The fiscal deficit target for FY 2024-25 is estimated at 4.8% of GDP, lower than the original target of 4.9%. For FY 2025-26, the government has projected a further reduction to 4.4% of GDP.
- Under a moderate fiscal consolidation strategy, the fiscal deficit is expected to decline:
- 4.4% in FY 2026
- 3.5% in FY 2031
- While this represents a gradual improvement, experts caution that reaching the Fiscal Responsibility and Budget Management (FRBM) Act target of 40% debt-GDP ratio will take longer than expected.
Expert Analysis and Concerns
- Longer Transition Period: Experts argue that achieving a 40% debt-GDP ratio will require several decades, raising concerns about delayed fiscal commitments.
- Private Sector Borrowing Constraints: With a fiscal deficit of 4.4% and state governments contributing an additional 3.3%, there is limited room for private and non-governmental sector borrowing. This could lead to increased foreign borrowing and higher current account deficits.
- Fiscal Space for Growth: The transition to a debt-based fiscal strategy is expected to free up resources for infrastructure investments, welfare programs, and innovation-driven initiatives.
Conclusion
- The Union Budget 2025 marks a major shift in India’s fiscal policy, replacing fiscal deficit targets with a more flexible and transparent debt-GDP ratio approach.
- While this strategy provides long-term fiscal stability, its success depends on nominal GDP growth, effective fiscal management, and global economic conditions.
- The challenge remains in achieving sustainable debt reduction while ensuring adequate investment in development and economic expansion.
- India’s ability to strike this balance will define the success of this fiscal transformation.
India’s Debt-GDP Strategy FAQs
Q1. What is the new fiscal anchor introduced in Union Budget 2025?
Ans. The government is shifting from fiscal deficit targeting to a debt-GDP ratio as the primary fiscal anchor from FY 2026-27.
Q2. Why is the debt-GDP ratio considered a better fiscal indicator?
Ans. It provides a comprehensive measure of fiscal health, capturing both past and present borrowing trends, unlike annual deficit targets.
Q3. What are the projected debt-GDP ratios under different scenarios?
Ans. By FY 2031, under different nominal GDP growth rates:
- Mild reduction: 52.0% – 50.1%
- Moderate reduction: 50.6% – 48.8%
- High reduction: 49.3% – 47.5%
Q4. How will this affect fiscal deficit targets?
Ans. The fiscal deficit is projected to decline from 4.4% in FY 2026 to 3.5% in FY 2031, but achieving the FRBM Act target of 40% debt-GDP will take longer.
Q5. What are the risks associated with this shift?
Ans. Private sector borrowing limitations, foreign debt risks, and longer fiscal adjustment periods could pose challenges to implementation.
Source: IE
Last updated on June, 2025
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