Budget 2026: Debt-to-GDP ratio to ease by 50 bps to 55.6% in FY27

Experts say announcements focus on sustenance of growth, resilience

Amid global uncertainties, the Centre has kept greater fiscal headroom and has budgeted for the new fiscal anchor — the ratio of debt to gross domestic product (GDP) — moderating only by 50 basis points to 55.6 per cent in FY27 from 56.1 per cent achieved in FY26, assuming a growth rate of 10 per cent in nominal GDP. 

“A declining debt-to-GDP ratio will gradually free up resources for priority sector expenditure by reducing the outgo on interest payments,” Union Finance Minister Nirmala Sitharaman said in her Budget speech on Sunday. 

Sitharaman last year had announced a shift to the debt-to-GDP ratio as the primary fiscal anchor, moving away from the age-old practice of targeting the fiscal deficit. The medium-term aim is to reach a ratio of 50 per cent with a deviation of one percentage point on either side by FY31. 

While last year’s Medium Term Fiscal Policy Cum Fiscal Policy Strategy Statement said the medium-term fiscal policy stance was “to keep the Central Government fiscal deficit to GDP ratio such that the debt to GDP ratio is on a declining path”, this year it was more explicit by terming the fiscal deficit the “operational target” for achieving the debt to GDP ratio. 

Central debt includes external public debt at current exchange rates, outstanding liabilities on the public account, including investment in special securities of states under the National Small Savings Fund, and extrabudgetary liabilities such as financial obligations raised by central-government public enterprises and government entities. 

Having achieved the fiscal-deficit target of 4.4 per cent of GDP in FY26, Sitharaman has budgeted it at 4.3 per cent for FY27.

At the post-Budget press conference, Economic Affairs Secretary Anuradha Thakur said the fiscal deficit would be an operational target to attend the debt to GDP ratio. 

“It’s not that we are going away from it. It will not be the monitorable target. But both work in tandem,” she added.

Sitharaman said drastic changes did not go down well. 

“One or the other section gets hurt. We need to be gradual. But yet (we have to) keep it well within the band which gives confidence. And to show that we care for fiscal prudence management. There is no point in dropping (fiscal deficit) to 4 per cent. It has to be steady so that the economy grows at a steady speed. It is a responsible and realistic number. We should achieve it and not bring any kind of turbulence anywhere.” 

Radhika Rao, senior economist at DBS Bank said the shift implied greater flexibility in fiscal management, particularly during global uncertainties and the risk of exogenous shocks. 

“Fiscal policy can, thereafter, undertake a more dynamic role in addressing evolving macroeconomic conditions. In this respect, the fiscal deficit adopts the position of a secondary target, with a few years likely to witness modest or no further consolidation at the headline level,” she added. 

The Budget documents said the fiscal strategy of the Union government in FY27 rested on the principle of continuing on the path of gradual fiscal consolidation while retaining operational flexibility. 

To improve the debt-maturity profile and to better manage redemption pressures, the government is adopting an active debt-management strategy through switching securities. 

“Switching of securities of about ₹1.64 trillion has been completed till date. These measures have helped improve the Union Government’s risk profile. Also, rollover risks in the Government debt portfolio are low,” the documents said. 

Dipti Deshpande, principal economist at CRISIL, said having brought the macro house in order, the Budget had focused on sustaining growth and resilience. “The shift in the fiscal goalpost — from fiscal deficit to debt — allows the government more discretion in managing the fiscal deficit, such that deficit reduction may even pause in a few years, enabling countercyclical fiscal support, especially during periods of shock.”