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Informist, Saturday, Feb. 1, 2025

 

By Siddharth Upasani

 

NEW DELHI – The 2025-26 (Apr-Mar) Union Budget marks the end of the fiscal deficit targeting era and the start of the debt-to-GDP one. And as the medium-term roadmap for the former will come to an end in March 2026, the roadmap for the latter has already been set in motion.

 

According to the Budget documents tabled on Saturday, the Indian government is looking to cut its debt-to-GDP ratio to 50% by March 2031, with a band of 100 basis points on either side providing some flexibility. The ratio, which sits at 57.1% in FY25, will need to be reduced by 122 bps on average every year if the mid-point of the 49-51% range is to be met. In FY26, the reduction will be a tad lower at 100 bps.

 

Perhaps the slow-ish start can be forgiven in light of the huge changes made to the personal income tax rates and slabs that will set back the Centre around INR 1 trillion. "The fiscal wizardry of the numbers has been the ability to cut fiscal deficit from 4.8% of GDP in FY25 to 4.4% of GDP in FY26, while simultaneously announcing income tax concessions and retaining a decent public investment outlay," noted Aurodeep Nandi, Nomura's India economist. But the maths is not magical enough for those whose job it is to rate the national debt.

 

According to Christian de Guzman of Moody's Ratings, while the Indian government is on track to meet its near-term policy goals, "we do not expect a sufficient improvement in the debt burden, or the proportion of the budget earmarked for debt servicing to change our broader assessment that India's fiscal strength will remain weaker than most of its investment-grade peers". Clearly, the Centre reducing its debt-to-GDP ratio to 50% in six years is not impressive enough.

 

To be sure, the Budget documents see a best-case scenario under which the ratio could fall to as low as 47.5% by March 2031 if nominal GDP growth is assumed to be 11%. However, even that is unlikely to make Moody's and others of its ilk raise their low investment grade ratings on India.

 

WHITHER STATES' DEBT?

While a focused approach to reducing the Centre's debt-to-GDP ratio is commendable, it is not enough considering what really matters is the total public debt, which is Centre plus states. And when one adds the two, the numbers don't make for pretty reading.

 

According to the International Monetary Fund, India's total government debt was 83.0% of GDP in 2023 and is seen declining to 78.4% in 2029. For ratings agencies, this number is far too high, as they have often repeated over the years; according to Fitch Ratings, the median debt-to-GDP ratio of countries it rates BBB is just 58.3%.

 

In the government's defence, there is a recognition of the debt problem at the state level, with Economic Affairs Secretary Ajay Seth mentioning at the post-Budget press conference that "similar work by act has to be done through the state governments as well". One can also not deny the pressure from the Centre on states to eschew freebies that have come to define today's political economy. But that is not enough. As Seth suggested, states too must be legally bound to reduce their debt as a percentage of their gross state domestic product. If they aren't, it will all be for nothing.

 

HOPES PINNED ON GROWTH

Unlike advanced economies, India can depend on high growth rates to reduce its debt metrics. For FY26, the nominal GDP growth assumed is 10.1%, slightly higher than the statistics ministry's first advance estimate of 9.7% for FY25. The hope will be that the massive investments by the government in recent years will finally crowd in the private sector once it sees consumption demand picking up, resulting in growth picking up from the four-year low of 6.4% this year. And growth must pick up, for the government can't really meaningfully reduce its borrowing. As per the Budget documents, the Centre's fiscal deficit in FY26 is seen only INR 5.91 billion lower from FY25 in absolute terms.

 

In FY20, 31 paise of every rupee the central government spent was either to service its debt, for subsidies, or for pensions. In FY26, this figure is seen at 30 paise. As such, it is not easy for the Centre to cut its committed expenditure.

 

The government's debt-to-GDP ratio can fall if the denominator grows at a faster clip than the numerator. But the decline will be far more impressive--and acknowledged--if the Centre and states can come together to ensure the numerator moves in the right direction too.  End

 

Edited by Avishek Dutta

 

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