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Informist, Sunday, Feb. 1, 2026

 

By Priyasmita Dutta

 

NEW DELHI – The Union government "surprisingly" opted for a slower pace of fiscal consolidation in 2026-27 (Apr-Mar) despite having the elbow room to move faster, according to economists. Higher expenditure on account of pay increases for government employees and electoral considerations near the target year of FY31 is likely to put pressure on its finances. While this does mean the government will have to consolidate more aggressively in comparatively difficult years, it is too early to assume that the government will miss its debt-to-GDP target for FY31, economists said. 

 

The Budget, presented on Sunday, estimated the debt-to-GDP ratio for FY27 at 55.6% of GDP, 50 basis points lower than the estimate of 56.1% of GDP for FY26. The target for FY27 was, however, at least 50 basis points higher than what was expected. FY27 will be the first year of the government's move to target debt as a percentage of GDP as the main parameter to track fiscal consolidation, instead of the fiscal deficit target that has been used in the past. The government is looking to cut its debt-to-GDP ratio to 50% by March 2031, with a band of 100 bps on either side. This means, it will have to cut its debt-to-GDP ratio by at least 140 bps each year, which is a tall task; more so, given the global geopolitical situation and the challenges of boosting domestic growth. 

 

Consequent to the move to debt-to-GDP ratio, the Budget projected the fiscal deficit in FY27 at 4.3% of GDP, 10 bps lower than the estimate for FY26 and higher than the 4.2% expected by economists. This means the fiscal consolidation targeted in FY27 is the slowest in six years.

 

"We hoped for a bigger fiscal consolidation in FY27. We estimated fiscal deficit to be cut to 4.2% and not 4.3%. The Budget also did just 0.5?bt consolidation. They should be doing at least 1?ch year to meaningfully reach the target," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership. "It may be difficult for the government to consolidate steeply in FY28 – when pay commission payout takes effect, or in FY30, when general elections are around the corner," Upadhyay told Informist. 

 

The government has formed the eighth Central Pay Commission which will make recommendations about salary and compensation increases for central government employees. Pay commissions are typically set up every 10 years and their recommendations, when implemented, create pressure on government finances. The next general elections are likely to be held in 2029, which means the government will be tempted to announce populist measures around then – which will dilute or delay fiscal consolidation.

 

Defending the pace of gradual fiscal consolidation, Finance Minister Nirmala Sitharaman Sunday said such a path ensures the economy is not hurt. A contractionary fiscal policy tends to drag growth down. As such, India's GDP growth – in real terms – is projected at 6.8-7.2% in FY27, lower than the 7.4% estimated for FY26. The nominal GDP growth in FY27 is projected at 10%, higher than 8% for FY26. 

 

"Our reading is that the pace of reduction is not aggressive, keeping in mind the need to spur growth," Radhika Rao, executive director and senior economist at DBS Bank, said in a note.

 

The government's debt-to-GDP ratio could fall if GDP grows at a faster clip than debt. 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 the next five years will mean the debt stock could expand by around INR 88 trillion even as the debt-to-GDP ratio falls to 50% by March 2031, meeting the target laid down in the last Budget. The glide path, therefore, allows the government to choose an expansionary Budget if the need arises and assume more aggressive consolidation in high-growth years.

 

According to Upadhyay, it will become important for the government to ensure nominal GDP continues to grow at a steady pace for debt to fall meaningfully. "If 10% nominal GDP is maintained, we can get to about 4% fiscal deficit by FY31. But if nominal GDP grows 10.5-11%, fiscal deficit can be 3.5%, so the growth pace is important," he said. 

 

Economists unanimously agree that the government may have kept its fiscal consolidation plan for FY27 on the "conservative" side owing to the tepid revenue growth in the current fiscal year. Tax collections are likely to pick up and that will make room for more aggressive consolidation in later years. 

 

Madan Sabnavis, chief economist, Bank of Baroda, said that the government's weaker revenues in FY26 have perhaps pushed it to adopt a gradual stance in FY27, which may improve in subsequent years when revenues are better. "This year, taxes are slow due to the incentives announced earlier, which is also dragging collections in FY27. Going forward, collections will stabilise and allow the government to adopt a steeper stance," he told Informist. 

 

The FY27 Budget projects total tax collections at INR 44.04 trillion, up 8.0% on year. Since nominal GDP growth is assumed at 10%, 8% growth in tax collections points to a tax buoyancy of only 0.8, the lowest in recent years. Tax buoyancy measures how well tax revenue is growing compared to economic growth. A buoyancy of over one means tax revenue is rising faster than GDP growth.

 

According to economists at BoFA Securities India, the government was "conservative" in its projections on the debt front, and may end up overshooting the debt target, especially with a new GDP series expected by the end of February. 

 

The Ministry of Statistics and Programme Implementation is in the process of revising the GDP base year to FY23 from FY12. The ministry will release its GDP growth estimate for FY26 based on the new series on Feb. 27 and all subsequent GDP data releases will be based on FY23 prices. This revision is broadly expected to push up the GDP reading a bit.

 

India last revised the GDP base year over a decade ago, shifting it to FY12 from FY05. That revision had resulted in a sharp upward adjustment to growth estimates and FY14 GDP growth was revised to 6.9% from 4.7%. However, that revision had also entailed changes to the methodology used to calculate GDP.

 

All said, Moody's Ratings, which has been critical of India's debt metric, remained unimpressed with the conservative fiscal glide path. Christian de Guzman, senior vice-president at Moody's, said the rating agency does not expect significant progress on debt reduction, leaving its broader assessment of India's fiscal strength intact. Moody's currently rates India at the lowest rung of investment grade at 'Baa3' with a 'Stable' outlook.  End

 

Edited by Avishek Dutta

 

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