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Informist, Monday, Apr. 7, 2025

 

By Priyasmita Dutta

NEW DELHI – The Indian government's impending shift to a fiscal consolidation strategy that targets a reduction in the debt-to-GDP ratio rather than the fiscal deficit will provide it with the room to announce a stimulus, if required, at any stage to counter a growth slowdown, according to a top finance ministry official. Speaking on the condition of anonymity, the source said the government's assessment is that the fiscal deficit over the next five years may not consistently decline, depending on how the economy performs.

 

"There may be few financial years within the next five fiscals where the economy will need support and so purse strings will have to be loosened," the official said, adding that the while the fiscal deficit "can rise intermittently should the need arise", the debt-to-GDP must keep falling.

 

As per the Budget documents for 2025-26 (Apr-Mar), the Centre is aiming to cut its debt to 50.0% of GDP, in the range of 49-51%, by FY31. In FY26, the ratio is estimated to be 56.1%.

India's GDP growth is set to fall to a four-year low of 6.5% in FY25. Not only is this seen as being overly optimistic as it will require growth to surge to 7.6% in Jan-Mar, the imposition of reciprocal tariffs by the US on India and other countries is seen dragging growth lower by a significant margin.

 

Last week, Goldman Sachs' economists warned that India's GDP growth in 2025 could be adversely impacted by as much as 50 basis points because of the direct and indirect effects of the US' reciprocal tariffs. In such a situation, the Indian government could potentially use the flexibility on the fiscal deficit front provided by the debt-to-GDP framework to boost growth by higher expenditure, if needed, the official said.

"We don't have a particular (fiscal deficit) target to adhere to. So we can allow it to shoot up in a particular year if there is a need for it," the official said. "These are uncertain times. We cannot foresee policy and financial difficulties that may need the government to intervene."

While the government is on track to meet its medium-term target of lowering the fiscal deficit to below 4.5% of GDP this year--the FY26 Budget has targeted 4.4%--there are no rolling targets available starting next year. According to economists from National Institute of Public Finance and Policy, an autonomous research institute that operates under the aegis of the finance ministry, a fiscal deficit of 3.3-3.7% of GDP by FY31 can help reduce the debt-to-GDP ratio as per the Centre's glidepath.

However, according to the above finance ministry official, the government is "not fixated" on any particular fiscal deficit number and will be comfortable with the figure being around 4% of GDP by the end of FY31. "Can we afford 9.2% fiscal deficit? No. But do we have to cut it to 3%? Not really," the official said.

The Centre's fiscal deficit had jumped to 9.2% in FY21 as the coronavirus pandemic hit incomes and pushed up government's expenditure. At the time, the Centre was targeting to reduce the deficit to 3.0% in FY21.  End

 

Edited by Akul Nishant Akhoury

 

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