In new debt-to-GDP era, FY27 target set at 55.6%

Fiscal deficit angle

India’s high public debt levels have been repeatedly cited by global ratings agencies as an obstacle to better ratings, which can help lower the cost of the government’s borrowings – which is set to rise sharply to Rs 17.2 lakh crore next year from Rs 14.61 lakh crore in 2025-26 on a gross basis to finance the estimated fiscal deficit of Rs 16.96 lakh crore, or 4.3% of GDP. Sitharaman said on Sunday that the Centre had, as promised, achieved its fiscal deficit target of 4.4% of GDP for 2025-26. She later told reporters that the 4.3% fiscal deficit target for next year was a “responsible and realistic number”.

“Drastic changes don’t go down well and one section or the other gets hurt. We will have to be gradual, but yet keep it well within that band which gives confidence and to show that we care for fiscal prudent management. There is no point in me dropping it to, let’s say, 4%. It has to be steady so that the economy goes in a steady speed,” the Finance Minister said in the post-Budget press conference.

According to Christian de Guzman, Senior Vice President at Moody’s Ratings, the Budget leaves India’s sovereign credit profile “largely unchanged” and that he did not expect “significant progress on debt reduction… leaving our broader assessment of India’s fiscal strength intact.” And while the government continues to demonstrate its commitment to — and a lengthening track record of — fiscal consolidation, the minor 10-basis-point proposed reduction in the fiscal deficit means the metric “remains wider than any of those incurred during the current government’s first term in office”.

Paying back debt

This significant increase in the Centre’s borrowing — used to finance the fiscal deficit — has been necessitated by a big jump in past debt due to be repaid in 2026-27. As per latest data from the Reserve Bank of India, the Centre next year needs to pay back Rs 5.47 lakh crore worth of money borrowed in previous years. Netting for these repayments, the Centre’s borrowing is seen at Rs 11.73 lakh crore, slightly up from Rs 11.33 lakh crore this year. Going forward, the Centre’s debt repayments will rise even more and go up to Rs 9.06 lakh crore in 2030-31.

Experts point out that the high interest payments on debt already accumulated hamper the government’s ability to spend on productive areas. In 2026-27, for instance, the Centre’s interest payments will rise from Rs 12.74 lakh crore this year to Rs 14.04 lakh crore. To put this number into perspective, this accounts for 26% of the government’s entire projected expenditure of Rs 53.47 lakh crore for 2026-27. In contrast, the Centre’s capital expenditure target for next year, at Rs 12.22 lakh crore, is lower than its interest payments.

The Economic Survey for 2025-26, presented on Thursday, had said the debt-to-GDP target is a “concrete commitment with a specific date” which also affords the government “flexibility to fine-tune fiscal policy in response to emerging needs in the intervening period” at a time when the geopolitical and geoeconomic environment is volatile and unpredictable.

The Budget documents cited the same geopolitical and geoeconomic uncertainty as reasons for not providing the so-called ‘rolling targets’ for the debt-to-GDP ratio for the next two years.

“… uncertainty associated with significant changes in global macroeconomic and geopolitical environment continue to be concerns in fiscal policy management. While India’s growth outlook remains positive… it is not insulated from the risks emanating from outside the country. In this context, rolling targets for next two years have not been provided,” the Budget documents said.