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Informist, Friday, Jan. 30, 2026

 

By Priyasmita Dutta

 

NEW DELHI – The Economic Survey for 2025-26 (Apr-Mar) made a case for the government to continue with just debt-to-GDP fiscal consolidation glide path without laying down a definite fiscal deficit path, dashing the hopes of those expecting an announcement on the latter in the upcoming Budget for FY27. According to the Survey, authored by a team led by Chief Economic Adviser to the government V. Anantha Nageswaran, a debt glide path lets the government continue with fiscal consolidation while ensuring there is adequate room to make adjustments based on the evolving needs of the economy. 

 

Many economists flagged that a debt-to-GDP glide path is not adequate to ensure fiscal discipline, and that the Budget must lay down a concrete fiscal deficit path, in line with the Fiscal Responsibility and Budget Management framework. The Survey argued that, while "prima facie appropriate", given the highly uncertain global environment, it is important to "retain greater policy freedom" and commit to targets that the government can deliver on. 

 

According to economist N.R. Bhanumurthy, a debt-to-GDP glide path isn't enough to ensure fiscal discipline and there is a need for a fiscal deficit path as well, consistent with the public debt and the nominal GDP growth path. "It depends on what deficit path that we are going to assume, the outcome of that would be your debt path," Bhanumurthy, director of Madras School of Economics, had told Informist in an interview on Jan. 9. "While debt is an anchor, we need instrument to achieve and that instrument is deficit."

 

The government has projected fiscal deficit for FY26 at 4.4% of GDP, marking the last leg of its fiscal consolidation path it had announced in the FY22 Budget. 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 should be 50% of GDP, plus or minus 1%, by FY31, down from an estimated 56.1% at the end of FY26.

 

The Economic Survey argued that new fiscal policy framework is a "concrete commitment" with a specific date, yet it "affords the government flexibility to fine-tune fiscal policy in response to emerging needs in the intervening period, in a volatile and unpredictable geopolitical and geo-economic environment". 

 

MATHEMATICAL WIZARDRY

Based on first advance estimates, the nominal GDP is likely to grow 8% in FY26 to INR 357 trillion in absolute terms. Assuming nominal GDP grows 10% in each of the next five financial years, the government's fiscal deficit, in absolute terms, can rise to over INR 25 trillion in FY31 from the current level of INR 15.69 trillion estimated for FY26, while maintaining a 4.4% fiscal deficit target if it wants to. Alternatively, assuming the government keeps the absolute fiscal deficit at the same level of INR 15.69 trillion, a 10% average nominal GDP growth will shrink the deficit to 2.7% of GDP by March 2031 in percentage terms. 

 

Similarly, the government's debt-to-GDP ratio can fall if the denominator grows at a faster clip than the numerator. At 56.1%, the government's outstanding debt at the end of FY26 will be around INR 200 trillion. An average 10% nominal GDP growth over next five years will mean the debt stock can expand by around INR 88 trillion while the debt-to-GDP ratio will fall to 50% by March 2031, fulfilling the target laid down in the last Budget. The debt-to-GDP framework, therefore, allows the government to choose an expansionary Budget if the need for it arises and assumes a more aggressive glide path in high-growth years.

 

To be sure, the FY26 Budget documents did see a best-case scenario under which the ratio could fall to as low as 47.5% by March 2031--if nominal GDP grows at 11%. For the ratio to go down that much, it will need to be cut by 122 basis points on an average every year if the mid-point of the 49-51% range is to be met.

 

To sum up, debt sustainability and fiscal consolidation could be structurally misleading should one wish to look at the overall consequences of the Budget choices as debt could be volatile with growth shifts. Hence, primary deficit, or surplus, becomes a more trustworthy metric to ensure fiscal discipline and that is a mile away. According to the last Budget, 24 paise of every rupee the government earns in FY26 come from borrowing and other liabilities, higher than the 22 paise it will get from income tax collections--the government's largest chunk of tax revenue.

 

FUTURE HOPES

According to the Economic Survey, a return to a "rule-based" regime will likely be "credible and durable if ushered in after a period of lower global macro uncertainty and after debt and/or deficit ratios come meaningfully closer to 50% or 3% of GDP, respectively."

 

Even after adopting the debt-to-GDP glide path, it is important that the government continues to signal it is committed to fiscal prudence and that the shift in the fiscal target from deficit to debt is not an excuse to derail from fiscal discipline, said Sonal Varma, the managing director and chief economist, India and Asia ex-Japan, at Nomura Singapore Ltd., told Informist in an interview on Jan. 20.

 

Finance Minister Nirmala Sitharaman will present the Budget for FY27 on Sunday and all eyes will be on the details she will announce on the medium-term fiscal glide path. Moreover, the Survey hinted at the possibility of commentary on general government debt consolidation in the Budget. As the central government continues fiscal consolidation over the medium term, the general government debt, including that of the states and the Centre, is expected to remain on a consolidation trajectory, it said.  

 

"Going forward, the Centre's credible medium-term goal to converge towards a debt-to-GDP ratio of 50±1% is expected to provide a policy anchor for sustaining this consolidation at the general government level," CareEdge said in a report.  End

 

Edited by Akul Nishant Akhoury

 

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