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Informist, Thursday, Mar. 27, 2025

 

NEW DELHI – The National Institute of Public Finance and Policy said in a paper that fiscal deficit in the range of 3.3% and 3.7% by the end of 2030-31 (Apr-Mar) can support the Centre's desired debt-to-GDP target of 50%, as announced in the Budget for FY26. "Achieving this would require concerted efforts towards enhancing revenue streams and effectively controlling expenditure while maintaining a healthy trajectory for capital expenditure to spur growth," the paper, authored by professors at the institute, said.

 

The Budget for FY26 had announced that the Centre aims to lower its debt-to-GDP ratio to 50% by March 2031, with a band of 100 basis points on either side from 57.1% in the end of the current year and 56.1% at the end of FY26. 

 

The glide path for lowering the Centre's debt-to-GDP ratio followed Finance Minister Nirmala Sitharaman's announcement made in the the full Budget for FY25 in July that the focus of fiscal consolidation will move to the said metric from annual fiscal deficit targets starting FY27. In FY25, the central government's fiscal deficit is set to decline to 4.8% of GDP, and the target for FY26 is set at 4.4%.

 

The Budget had detailed different scenarios of fiscal consolidation based on various GDP growth projections. It had said, if the nominal GDP grows at 10%, the debt-to-GDP ratio can be lowered to 49.3-52% by the end of FY31; if the nominal GDP is 10.5%, the debt-to-GDP ratio can be lowered to 48.4-51% by end of FY31; and if the nominal GDP ratio is 11%, the debt-to-GDP ratio can be lowered to 47.5-50.1%, depending on how steep the consolidation is. 

 

In the paper, the National Institute of Public Finance and Policy said that based on their assessment, when the nominal GDP growth rate is 10% and there is moderate degree of fiscal consolidation, fiscal deficit should reach 3.5% by FY31, whereas with mild and high degrees of fiscal consolidation, it should reach 3.9% and 3.1%, respectively. Similarly, if the nominal GDP is 10.5%, the fiscal deficit should reach 3.5% by FY31 with moderate consolidation, with 3.1% and 3.8% in case of mild and high level of consolidation. And, if the nominal GDP is 11%, the fiscal gap should fall to 3.4% in case of moderate consolidation and 3% with high fiscal consolidation and 3.8% with mild consolidation. 

 

"Notably, it is only with a high degree of fiscal consolidation that the fiscal deficit approximately reaches the 3% limit recommended by the FRBM Act," the paper added. The Fiscal Responsibility and Budget Management Act had originally mandated that the fiscal deficit be lowered to less than 3% by FY21, however that plan was disrupted by the COVID-19 pandemic.  End

 

Reported by Priyasmita Dutta

Edited by Tanima Banerjee

 

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