NEW DELHI: The current financial year is the first in which the government shifted from budget deficit to debt stock as the main anchor of fiscal consolidation. But with the size of nominal gross domestic product (GDP) falling in the new GDP series, the starting point itself has changed. This and fresh fiscal challenges arising from external issues make the task of bringing down the debt-to-GDP ratio to 49-51% by March 2031 much more difficult, if not impossible, economists said.
The central government debt was 58.2% of GDP in FY26, based on the new GDP series, according to data shared by the finance ministry in Parliament last week. This is much higher than the revised Budget estimate of 56.1% based on the old GDP series.
“I won’t say it is not possible, but a lot depends on the pace of nominal GDP growth and the pace of fiscal consolidation,” said Anubhuti Sahay, head of India economics research at Standard Chartered Bank. “The government will have to gradually bring down its fiscal deficit, which might be difficult unless private sector investment picks up.”
Meeting the 50% debt-to-GDP target, or even the 49-51% range would require high nominal GDP growth and gradual fiscal consolidation, with the latter seen difficult to achieve.
“Assuming nominal GDP growth of 10% between FY28 and FY31, and a 0.2% of GDP reduction per fiscal year, the government can still meet its debt-to-GDP target by FY31,” said Gaura Sen Gupta, chief economist at IDFC First Bank. “The 50% debt-to-GDP target may not be met but it can be around 51%, which is still in the range the government has provided,” Sen Gupta said.
For the current financial year, economists project nominal GDP growth around 13-14%, much higher than the 10% estimated in the Union Budget. The government has also pegged the fiscal deficit at 4.3% of GDP for FY27, which, economists say, could be missed depending on impact of the war in West Asia.
So far, the government has maintained it will meet the fiscal deficit target this year. Finance Minister Nirmala Sitharaman on Sunday said that Budget numbers for FY27 do not need to be tweaked as of now, as the government has sufficient buffers to deal with challenges arising from the war in West Asia.
Challenges in reducing the fiscal deficit extend beyond FY27. “The government will have to revise the debt targets. Because of the revision in the GDP numbers, much more fiscal consideration will be required to meet the current medium-term debt-to-GDP target of 50% of GDP,” said Abhishek Upadhyay, co-head economics and fixed income research at ICICI Securities Primary Dealership.
According to Upadhyay, there is not only a high probability of some fiscal slippage this year, but lowering the fiscal deficit will also be difficult in FY28 as the government will have to account for Pay Commission related expenditure. “And FY29 is an election year, when the prospects of fiscal consolidation are generally lower,” Upadhyay said.
Source: The Financial Express
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