India's macro aspirations: Fiscal discipline will continue with thrust on reducing debt

The central government will stay the fiscal consolidation course and tailor its annual deficit targets from 2026-27 in such a manner that its debt-to-GDP ratio will progressively decline, finance minister Nirmala Sitharaman said on Tuesday.

"The fiscal consolidation path announced in 2021 (to reduce fiscal deficit to 4.5% of GDP by FY26) has served our economy well, and we aim to reach a deficit below 4.5% next year."

After a pandemic-induced spike to 89% of GDP in FY21, the combined debt of the central and state governments has dropped to about 81% now.


From 2026-27, she said: "our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP".

At a post-budget briefing, finance secretary TV Somanathan explained that the reduction in debt ratio will become the primary anchor for the government's fiscal management from 2026-27, instead of fiscal deficit.

Madan Sabnavis, chief economist at Bank of Baroda, said: "It can be assumed that even in the coming years, there will be no straying from (fiscal consolidation) path. We can also expect the Centre to nudge states to follow suit even as the FRBM norms are being adhered to by them."

Noted economist NR Bhanumurthy said the debt ratio reduction is a necessary move. "However, it needs a clear road map. Perhaps the 16th Finance Commission may be asked to offer its suggestions in this regard."