Fiscal policy planning: Why India needs a clearer medium-term plan

India's fiscal discipline has improved, but high debt, future spending pressures and bond-market constraints make deeper consolidation increasingly difficult

One notable shift in the Union Budget this year was the yardstick for gauging fiscal performance. The government had earlier announced that, starting in 2026-27, it would maintain the fiscal deficit at a level that keeps its debt as a percentage of gross domestic product (GDP) on a declining path. Accordingly, the government is aiming to bring down the debt-to-GDP ratio to 55.6 per cent in 2026-27, compared to the revised estimate of 56.1 per cent in 2025-26. The fiscal deficit, as a result, has been pegged at 4.3 per cent of GDP in 2026-27, as against 4.4 per cent this financial year. It is worth highlighting that the government has done remarkably well in fiscal management over the past several years. It has reduced the fiscal deficit from 9.2 per cent in the pandemic year (2020-21) to 4.4 per cent. Further, the consolidation has been achieved with a substantial improvement in the quality of expenditure. 

However, the way forward could be challenging. The government has communicated that it intends to reduce the central-government debt-to-GDP ratio to 50±1 per cent by 2030-31. There are two important issues here. First, even if the government achieves this target, the debt level will still be high. The Fiscal Responsibility and Budget Management framework had envisaged limiting the general-government debt to 60 per cent of GDP and the central-government debt to 40 per cent by March 2025. In the current scheme of things, the central government’s debt stock will be about 10 percentage points higher than the level desired in 2031. Second, the government could have been more ambitious on consolidation next year, given that it may become more difficult in the coming years. The government, for instance, has to provide for the Eighth Pay Commission. There will also be a general election before 2030-31. Thus, given that the economy is growing at a rate higher than expected, the government could have gone for more tightening. 

Ideally, to keep debt on a sustainably declining path, the government should run at least a small primary surplus. The pace of debt reduction will be determined also by nominal GDP growth and interest rates. Thus, it will be important that growth remains at higher levels. Further, in terms of overall fiscal and macroeconomic management, two other issues are worth keeping in mind. One, it is important to look at general-government debt, which is at about 80 per cent of GDP. As a recent analysis in this newspaper showed, debt levels in states can be expected to rise, potentially negating the reduction at Union level to a large extent in the coming years. Thus, it is crucial to find ways of faster consolidation, both at Union and state levels. Two, in overall fiscal planning, it is important to factor in the financing capacity of the economy. 

Higher funding requirements of the government can crowd out private investment. As reports suggested, the bond market is concerned about a higher supply of government bonds. Notably, household financial savings in 2024-25 were about 6 per cent of GDP, much lower than the general government-financing requirement. If private corporate investment revives as desired, market interest rates could move up sharply. Therefore, it is fair to argue that there is a need for medium-term general-government fiscal planning beyond the annual Budget numbers.