Centre may set 54.5-55% debt-to-GDP goal for FY27 in Union Budget

The central government is likely to target a reduction in the debt-to-GDP (gross domestic product) ratio to 54.5-55 per cent for FY27 in the forthcoming Union Budget, down from the 56.1 per cent budgeted for FY26, an official said. 

“The government is likely to follow a moderate consolidation path for FY27. A final call on the growth scenario for the next financial year will be taken after the release of the first advance estimates of GDP for FY26 on January 7,” the official said, requesting anonymity. 

In the FY26 Budget, Union Finance Minister Nirmala Sitharaman announced a shift to the debt-to-GDP ratio as the primary fiscal anchor, moving away from the practice of using the fiscal deficit as the operational target. Under the new glide path, the Centre aims to bring down the debt-to-GDP ratio to 50 per cent by FY31, with a permitted deviation of one percentage point on either side. 

According to the Medium-Term Fiscal Policy-cum-Fiscal Policy Strategy Statement tabled alongside the FY26 Budget, the debt path for FY27-FY31 has been modelled under three nominal GDP growth assumptions: 10 per cent, 10.5 per cent and 11 per cent. For each growth scenario, three consolidation paths —mild, moderate and high — have been outlined, depending on the degree of fiscal tightening the government chooses to pursue. 

“This approach would provide requisite operational flexibility to the government to respond to unforeseen developments, while placing Centre’s debt on a sustainable trajectory in a transparent manner,” the statement said. While future Budgets will continue to specify annual fiscal deficit numbers, these will now be derived from the debt target rather than serving as the primary target.

 

Sitharaman has said the government’s endeavour would be to keep annual fiscal deficits aligned with a declining debt trajectory. “Our endeavour will be to keep the fiscal deficit each year such that the central government debt remains on a declining path as a percentage of GDP,” she said while presenting the FY26 Budget.

 

For FY26, the government has set a fiscal deficit target of 4.4 per cent of GDP, lower than the revised estimate of 4.8 per cent for FY25. Earlier this month, Sitharaman told Parliament that the government would achieve a debt-to-GDP ratio of 56.1 per cent for FY26, while cautioning that the rising debt-to-GSDP (gross state domestic product) ratios of states remained a concern.

 

In its latest Article IV consultation report on India, the International Monetary Fund suggested the government to review its medium-term debt target and make it more ambitious by expanding the debt anchor to include state government liabilities. Faster consolidation, the Fund said, would help reduce the debt-servicing burden sooner and rebuild fiscal buffers against future shocks.

 

Rating agency CareEdge Ratings has projected a slightly slower pace of consolidation, estimating the fiscal deficit for FY27 at 4.2-4.3 per cent of GDP. The agency said the Centre could still reduce its debt ratio to around 50 per cent (±1 per cent) by FY31, assuming nominal GDP growth averages 10.7 per cent over the next five years. “Laying out a debt trajectory gives the government flexibility to manoeuvre the fiscal deficit each year, depending on growth prospects,” it added.