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Informist, Wednesday, Jan. 28, 2026

 

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--Mridul Saggar: Govt should not try anything extraordinary in FY27 Budget
--Mridul Saggar: Govt fisc consolidation needed to keep space for exigencies
--CONTEXT: Former RBI ED Mridul Saggar's comments in interview to Informist
--Mridul Saggar: Govt should aim fisc gap of 4.2% of GDP or lower for FY27
--Mridul Saggar: Expect govt to meet fiscal deficit aim of 4.4% of GDP FY26
--Mridul Saggar: Expect Indian economy to grow around 7% in FY27
--Mridul Saggar:Impact of GST cut on demand been slightly less than expected
--Mridul Saggar: MPC should hold repo rate unless clear growth slowdown seen
--Mridul Saggar:No India-US trade deal secenario largely priced in by FX mkt
--Mridul Saggar: Rupee internationalisation unlikely in near decades
--Mridul Saggar:RBI should not leave too much surplus liquidity on the table
--Mridul Saggar: Need good targets on primary surplus, gross fiscal deficit

 

By Pratiksha and Shubham Rana

 

NEW DELHI – The government should not try to do anything extraordinary in the Union Budget for 2026-27 (Apr-Mar), and should continue to focus on fiscal consolidation to keep fiscal space for exigencies, according to Mridul Saggar, former executive director of the Reserve Bank of India and a former member of the central bank's rate-setting Monetary Policy Committee.

 

"My suggestion for the forthcoming Budget would be not to try anything extraordinary because that would be the best course to achieve extraordinary results," Saggar told Informist in an interview. "I think it is important that the government stays on that course, at least in the coming Budget because that is required to generate the fiscal space," said Saggar, a professor at Indian Institute of Management-Kozhikode and head of its Centre for Macroeconomics, Banking & Finance.

 

The government should target a fiscal deficit of 4.2% of GDP or lower for FY27, Saggar said, adding that this would bring clear benefits – it would generate space for a counter-cyclical fiscal stimulus amid global uncertainties. For the current financial year, Saggar expects the government to meet the targeted fiscal deficit of 4.4% of GDP.

 

"Second, if there is an unforeseen sort of geopolitical conflict in the region, which I don't expect, but one should never rule out anything, then one would have space to do more spending. It will be required to combat those conflicts," Saggar said.

 

The most important reason why fiscal consolidation is necessary at this juncture is that the government borrowing programme should not bloat again, the IIM professor said. Even if the fiscal deficit for FY27 is contained at 4.2% of GDP, the gross market borrowing could be in the vicinity of INR 16.5 trillion and the net market borrowing around INR 11 trillion or higher, he said. "Anything above that would put pressure on the bond yields and transmit to higher interest rates in the economy," Saggar said. "This will not be growth-supportive."

 

Saggar expects the Indian economy to grow around 7% in FY27, against the government's first advance estimate of 7.4% for the current year. Growth of 7% next year, he said, was possible but not an easy task. "I think even if our baseline is roughly 7% or more aptly slightly underneath that, we also need to consider the very large uncertainty bands around those numbers, Saggar said. "It entirely depends on how the world behaves, in terms of geopolitics, in terms of global trade. On a higher probability, maybe the numbers will fall just short of 7%." 

 

Below are edited excerpts from the interview:

 

Q. The Union Budget is the nearest event right now. What is your expectation from it, considering the backdrop we are in on the external front? What would be your suggestions for it?

A. My suggestion for the forthcoming Budget would be not to try anything extraordinary because that would be the best course to achieve extraordinary results. In the last five years, the government has done very impressive fiscal consolidation, and I think the fiscal deficit-to-GDP ratio for FY26 would be met at 4.4%. I know the government had a little bit of difficulty given the personal tax and the GST tax cuts it gave. So, it is possible that the gross tax revenue may fall short, but they are matching it by doing expenditure reductions. So, I do expect them to meet the deficit targets.

 

But I'm a little worried about the Budget that follows the coming one. Market expectations are that maybe fiscal consolidation has run its course. I think it is important that the government stays on that course, at least in the coming Budget because that is required to generate the fiscal space. If they target 4.2% fiscal deficit to GDP ratio or less than that, the job would be much easier later on because it will bring three clear benefits.

 

One is that we are generating a space given the global uncertainties and that space for counter-cyclical fiscal stimulus is very, very essential at this juncture. Second, if there is an unforeseen sort of geopolitical conflict in the region, which I don't expect, but one should never rule out anything, then one would have space to do more spending. It will be required to combat those conflicts.

 

The third and the most important factor why fiscal consolidation is necessary at this juncture is that the government borrowing programme should not bloat again. And even if the fiscal deficit-to-GDP ratio is contained at 4.2%, the gross market borrowing could be in the vicinity of INR 16.5 trillion and maybe, net market borrowing could be INR 11 trillion or higher. Anything above that would put pressure on bond yields and transmit to higher interest rates in the economy. This will not be growth-supportive. The task will be cut out for RBI to manage the government borrowing programme and hopefully, it will use buybacks and switches liberally without recourse to T-bills funding.

 

The two Budgets which may follow the forthcoming one could risk a reversal because we are going to have the 8th Finance Pay Commission report coming in. And that is likely to be implemented in the FY28 Budget. One could then have higher revenue spending coming from higher salaries and arrears disbursement, given that pay revisions are due from the start of January 2026.

 

Additionally, we should remember, the FY29 Budget would be the pre-General Election Budget. So, if we have to do the further fiscal consolidation, which we certainly need, we have to do now rather than later.

 

Q. This will be the first Budget in which they shift to the new regime of targeting debt-to-GDP ratio. Is this a good move to shift to that right now?

A. Personally, I think it is better to have more than a single fiscal target. We can debate whether deficit targets, expenditure reduction rules or revenue enhancement targets work best but single liabilities side metric does increase the risk of unneeded or risky fiscal expansion. One can try to sum up everything in debt sustainability but that could be very misleading because the debt sustainability numbers become very volatile with growth shifts.

 

Therefore, if we are targeting central government liabilities at 50% of GDP by FY31 from 56.1%, this year we need good targets on primary surpluses as well as the gross fiscal deficit. More importantly, one will like to see fiscal council being established in India to work these numbers and strategy. 

 

Q. Do you have any broad view on what they should target, around 55% of GDP for FY27 or somewhere around that? 

A. It has to be 55% for sure and preferably, inside that.

 

Q. FY26 was another year in which growth has surprised on the upside, much higher than what was initially expected. Do you think India can sustain this 7% and above real GDP growth over the next five years?

A. Five years is a long horizon. In the coming fiscal year, achieving 7% is possible, but is not an easy task. But this also means nominal GDP growth of around 11%, though targeting it at 10.5% will add to the credibility of the Budget numbers and leave some cushion.

 

I think even if our baseline is roughly 7% or more aptly slightly underneath that, we also need to consider the very large uncertainty bands around those numbers. It entirely depends on how the world behaves, in terms of geopolitics, in terms of global trade. On a higher probability, maybe the numbers will fall just short of 7%.

 

Q. In FY26, the government first announced income tax cuts and then GST cuts to boost domestic consumption. Has domestic demand picked up because of these steps? And what more can the government do to improve domestic demand and growth?

A. I think the effect on consumption has been a wee bit less than what might have been anticipated, given the deep tax cuts we saw. But the important thing is the consumption hasn't fallen and still stays resolute in this very difficult environment.

 

It is not bad for the economy that consumption is holding up in this environment. I also see investment kicking in now.

 

There is certain evidence that firms are beginning to do some investments and certainly, these are not all the PLI-related investments. Mega ticket size investments are still not coming but with average capacity utilisation being above the long-term trend for some time now, I think companies are thinking of stepping up investment. If the global uncertainty comes down, I think there is every reason to expect investment to come up even more.

 

So, a big stimulus is not needed at the current juncture. It is not just by larger fiscal spending that aggregate demand can be boosted. What is needed is fiscal consolidation without a contractionary fiscal impulse and this can be done by rejigging the composition of its spending.

 

Q. What role do you think the RBI can play right now in supporting growth, while also ensuring that inflation doesn't shoot up?

A. I think the RBI has already done a lot to support growth. So, the rates have come down. And I think the transmission is also reasonably good.

 

I would suggest that it is time to hold policy interest rates and not go with deeper cuts unless we see a clear slowdown in growth numbers. We need to keep both space for fiscal and monetary policy, should things turn adverse but at the moment, if RBI can deliver a stable macroeconomic environment, that's the best course to have.

 

We have already seen upticks in global metal prices. If you build those into the forecast, inflation next year could average slightly above 4%. And that doesn't give room to RBI to do further cuts, especially when the exchange rate is also under pressure.

 

RBI can't afford to leave too much surplus liquidity. It can't afford to have too low or too high rates. So, more neutral policy would be a good policy.

 

Q. What has been your reading of how the RBI has managed the exchange rate, given the kind of uncertainties we are dealing with?

A. The RBI has faced difficulties on this front right from the second half of 2024. It has tried various permutations and combinations in policies. I think that experience only goes to reinforce that a time-tested exchange rate policy is the best.

 

Incrementally, we can afford a little more flexibility. But we can't leave the exchange rate completely flexible nor try to anchor the exchange rate to a fixed number, because we should allow automatic stabilisers to work in the economy.

 

I think more lately, the RBI has adopted a more flexible policy but that also seems to have run its course. In terms of the currency, maybe the rupee has adjusted for now and more movements can cause fundamental misalignments.

 

What is difficult at this juncture is that the past forward positions unwinding would pose difficulty on how the RBI manages the forward curve. Even at the one-year forward level, it needs to be cautious over where those premiums are going.

 

The entire structure of the forward premium, forward curve, needs to be closely watched along with the spot. But at the same time, RBI should not try to keep the exchange rate fixed; and we have to take into account how inflation and interest rate differentials are going from here. I think RBI should communicate less on the exchange rate policy now, and do its job more astutely.

 

Q. Even when the RBI has been pretty flexible in its strategy of late, there has been a looming perception that there may or may not be a trade deal or if there is one, will it be a favourable one or not. If there is no favourable trade deal in in the near term, considering there have been so many developments on that and it has been delayed so far, should the RBI let the rupee depreciate and adjust to US tariffs?

 A. I think no trade deal has to a large extent been already been priced by the currency market. The point is, even if you have a trade deal, how do you know how long it will last? So, given what is happening in EU-US trade deals and stuff, we have to recognise there will be volatility and uncertainty as we go along.

 

And I think that is the reason why I am saying that it is not the time to communicate more, it is time to keep a very, very nimble-footed response on liquidity and currency. So, that is the way to go about it.

 

And if one sees trade getting very badly affected in a multi-year framework or if current account deficits come back with high numbers, which is not the case as of now, but cannot be ruled out anyway; one has to be ready. For now, we are managing quite well. Should that happen, policy options should be kept open. 

 

Q. What is your view on the liquidity situation? Because even after the RBI has provided trillions of rupee liquidity via OMOs and FX forwards, overnight rates are still very high. Why do you think that is the case and how much more liquidity should the RBI provide?

A. It is the job of monetary policy operations to deliver overnight rates close to the policy rate. That correction is needed but it is not coming just by liquidity because now the question lingers about the possibility of more forex interventions with attendant risk that liquidity dries up in the future.

 

I would advise not to leave too much surplus liquidity on the table in this milieu because that money market liquidity does translate to FX futures and forwards. So, one has to have very nuanced liquidity operations, which sort of deliver surplus liquidity but not mega surplus liquidity.

 

Q. In the past, there has been communication from the RBI that it would prefer surplus liquidity to be around say 1% of NDTL. Do you think that communication should be there at this point?

A. I think 1% is a good number, but they shouldn't communicate this because there could be periods where you need to move up or down. But it is a good thumb rule to have.

 

Q. The RBI and the government have been promoting rupee internationalisation as a project for quite some time now. But given the kind of global landscape we are in and how aggressive the US administration has been on de-dollarisation not being something that they want, how long are we looking at for this to be at least a minor success?

A. I don't see internationalisation of the rupee happening in near decades. So, this is a long-term aspiration. Internationalisation of rupee is a long process. As we deepen our financial markets and widen our financial markets, more of our currency will become acceptable.  End

 

Edited by Avishek Dutta

 

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