31st January 2026: In tomorrows budget India is changing the way it measures fiscal discipline. From FY27, the government will use the public debt-to-GDP ratio as its main fiscal anchor instead of focusing largely on the annual fiscal deficit. This means India will borrow keeping in mind Public Debt-to-GDP ratio and not what they need to manage expenditure.
The change is driven by the limitations of the fiscal deficit as an indicator. While India’s fiscal deficit for 2025–26 is estimated at 4.4% of GDP, reasonable by global standards, it only reflects borrowing in a single year. It does not capture the full debt built up over decades. In contrast, the debt-to-GDP ratio presents a clearer picture of long-term financial health.
At present, the combined debt of the Centre and states stands at around 81% of GDP. With India’s GDP estimated at about ₹330 lakh crore, total public debt is close to ₹267 lakh crore. Servicing this debt requires substantial interest payments each year, reducing the funds available for infrastructure, healthcare, education, and other growth-oriented spending.
By adopting debt as the fiscal anchor, the government gains greater flexibility to prioritise capital expenditure. Higher investment in infrastructure can accelerate economic growth, which in turn helps lower the debt ratio over time.
The government has set a target to reduce central government debt to 50% of GDP by 2031, and to about 60% for the Centre and states combined over the next decade.
The success of this approach will depend on controlling revenue expenditure such as subsidies and salaries, while steadily increasing productive capital spending. Borrowing itself is not the concern; how the borrowed funds are used matters.
Borrowing for assets that generate growth and future revenue strengthens the economy. In that sense, the shift to a debt-to-GDP framework is a key step toward sustainable growth and long-term fiscal stability.
