Union Budget 2025: Govt details roadmap for shift to debt-GDP ratio as fiscal anchor from FY 2026-27

A debt-GDP ratio as a fiscal target is a “more reliable measure of fiscal performance as it captures the cumulative effects of past and current fiscal decisions”, it said. “It is expected that the debt to GDP based fiscal consolidation strategy would help rebuild buffers and provide requisite space for growth-enhancing expenditures,” the government said.

Debt to GDP ratio refers to the share of a country’s national debt to its gross domestic product. Rating agencies usually track total debt to GDP ratio that includes debt levels of both states and the central government. In FY25, the government’s fiscal deficit is estimated to be 4.8 per cent of the GDP as per the revised estimate, lower than the 4.9 per cent target in the budget estimate. For 2025-26, the fiscal deficit is estimated to be 4.4 per cent of the GDP.

The Centre also said that the choice of fiscal anchor aligns well with the “sustained efforts of the government to promote fiscal transparency through proper disclosure of off-Budget borrowings”. This approach is expected to provide operational flexibility to the government to respond to “unforeseen developments”, it said, adding that it is expected to put central government debt on a “sustainable trajectory in a transparent manner”. The government has detailed three degrees of fiscal consolidation — mild, moderate and high — linked to varying nominal growth rates of 10 per cent, 10.5 per cent and 11 per cent.

With a 10 per cent nominal growth rate, the central government’s debt-GDP ratio is estimated to reduce from 56.1 per cent in FY26 to 52.0 per cent (mild), 50.6 per cent (moderate) and 49.3 per cent (high) in FY31. With a nominal growth rate of 10.5 per cent, the debt-GDP ratio is estimated to decline to 51 per cent (mild), 49.7 per cent (moderate) and 48.4 per cent (high) in FY31. And with a nominal growth rate of 11 per cent, the debt-GDP ratio is estimated to reduce to 50.1 per cent (mild), 48.8 per cent (moderate) and 47.5 per cent (high) in FY31.

“The end-goal has been defined well as a declining debt-GDP ratio. There can be multiple ways to achieve it, whether through mild, moderate or aggressive fiscal consolidation. This follows the flexible fiscal targeting method as per international norms,” a senior government official told The Indian Express.

Experts, however, pointed out that the debt-GDP ratio will take several years to decline to the level outlined in the FRBM Act. “If we consider the moderate scenario considering 10.0 per cent nominal GDP growth, we derive the path of fiscal deficit to GDP ratio as falling from 4.4 per cent in FY26 to about 3.5 per cent in FY31 in incremental steps. It is clear that the debt-GDP ratio remains significantly above the FRBM Act target of 40 per cent and the fiscal deficit to GDP ratio also remains well above 3 per cent. It would take several years for the GoI to reach the FRBM Act debt-GDP target of 40 per cent. This amounts to considerable postponement of the commitment to the FRBM Act,” DK Srivastava, chief policy advisor, EY India said.

“If the GoI is claiming 4.4 per cent of GDP as its fiscal deficit and the state governments’ fiscal deficit amounts to about 3.3 per cent, this leaves little room for borrowing by the private corporate sector and the non-government public sector. This would force them to borrow more from abroad, taking the current account deficit above sustainable levels,” he added.