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Informist, Wednesday, Nov. 26, 2025

 

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--India govt debt-to-GDP aim of FY31 achievable without more fisc steps 
--India general govt debt seen declining to 77% of GDP in FY31 
--If US tariff persist, India must shift to neutral fisc stance in FY27 
--IMF: India needs to focus on revenue mop-up for continued public invest 
--IMF:India needs decisive fisc glide path in medium term to rebuild buffers 
--CONTEXT: IMF releases 2025 consultation report on India

 

NEW DELHI – India must ensure decisive fiscal consolidation over the medium term to rebuild buffers, with focus on domestic revenue mobilisation to provide space for a continued public investment push and other priority spending, the International Monetary Fund said Wednesday. On the spending side, fiscal consolidation should be driven by recurrent expenditure rationalisation, with capital spending expected to be maintained, though declining slightly as a share of GDP, IMF said in its country report titled 'India: 2025 Article IV Consultation'. 

 

Despite some pressure, this year's planned moderate fiscal consolidation remains achievable with strong spending discipline, but fiscal plans for 2026-27 (Apr-Mar) should adapt to emerging challenges, it said. "With an output gap expected to open next FY under the baseline (assuming that the 50% tariffs remain in place) and high external uncertainty, a neutral fiscal stance rather than consolidation would be warranted," the multilateral body said. "That said, if a tariff reduction avoids an output gap, fiscal consolidation should continue next year."

 

The government has projected fiscal deficit for FY26 at 4.4% of GDP, marking the last leg of fiscal consolidation roadmap. For FY27 onwards, the Centre has announced its intent to shift its fiscal consolidation benchmarking to metrics favoured by rating agencies, such as the debt-to-GDP ratio and monitoring interest expenses. The Budget documents for FY26 said the government aims to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP. Its target for fiscal consolidation is that the Centre's debt is 50% of GDP, plus or minus 1%, by FY31 from 56.1% in FY26. 

 

According to IMF, the Centre's debt-to-GDP target is achievable without further fiscal measures. A faster consolidation would also ease the high debt service burden sooner and help to rebuild fiscal buffers for future shocks. Measures through which India can rebuild buffers include further goods and services tax reform, reversal of earlier excise tax reductions, and expansion of the income tax base, it said. "Together with better targeting of subsidies and rationalising legacy expenditure schemes, this can create space for growth-enhancing expenditure on infrastructure and health."

 

IMF noted that if 50% US tariffs stay for prolonged period, the Centre's consolidation plan will start in FY28 to allow for a neutral fiscal stance in FY27. Indian authorities, however, felt it was premature to consider a pause in fiscal consolidation FY27, especially in the context of the credible and transparent fiscal guidance path that the government has been following. IMF held consultation with Indian authorities including Department of Economic Affairs Secretary Anuradha Thakur, Chief Economic Adviser V. Anantha Nageswaran, Reserve Bank of India Governor Sanjay Malhotra, RBI Deputy Governor Poonam Gupta, among others, in September. "If the tariff shock is resolved this fiscal year, the reform measures would start in FY2026/27 (FY27)," it said.

 

IMF also said that after the GDP base year revision takes place in February 2026, it would be appropriate for the government to revisit the debt target, with a view to making it more ambitious. In addition, expanding the scope, transparency and accountability of the target would further support credibility and improve multi-year planning.  

 

The multilateral development agency gave four suggestions to improve India's debt reduction effort and fiscal consolidation roadmap. 

 

First, the debt anchor should be broadened to include state government debt as well, with tailored fiscal adjustment paths for states, depending on their current fiscal positions and debt vulnerabilities. Second, operationalise the medium-term target with well-defined annual fiscal adjustment paths to clarify the government's intentions and guide financial markets. Third, strengthen the institutional architecture of public finances with setting up an independent fiscal body providing advice and oversight. Fourth, fiscal statistics at the state level should improve, including more timely data reporting and comprehensive disclosures. "Progress is visible in states' reporting of off-budget borrowing," IMF said. 

 

To IMF's second suggestion, Indian authorities said that specifying a fiscal deficit path may not be an optimal policy tool.

 

The general government deficit is expected to narrow further under current policies, supporting a gradual reduction in debt to 77% of GDP in FY31 from 81% in FY26, IMF said. Under shock scenarios, reflecting conditions like lower growth or slower fiscal adjustment, debt paths are skewed towards elevated debt levels, highlighting the importance of swiftly rebuilding buffers. "That said, India has some fiscal space to support domestic demand and shelter vulnerable households in case of adverse shocks."

 

Fiscal sustainability at the state level can be enhanced by strengthening incentives through a performance-based devolution formula, enhancing state-level revenue mobilisation and spending discipline, and promoting greater differentiation in state development loan spreads, IMF said.

 

All said, the overall risk of sovereign stress is moderate, IMF said, though it added that debt remains elevated at the end of the projection period and risks surrounding the debt path are tilted to the downside. Funding the entire climate change investment needs through existing financing sources as it could lead to a high risk of sovereign stress in the long term, pointing to a need for additional sources of concessional financing and greater private sector involvement, it said.  End

 

Reported by Priyasmita Dutta

Edited by Akul Nishant Akhoury

 

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