2 Feb 2026·Source: The Hindu

4 min

EconomyEDITORIAL

Budget 2026: New Fiscal Rule, Debt Targets, and Development Spending

Budget 2026's fiscal consolidation driven by cuts in development expenditure raises concerns.

Photo by Mathieu Stern

Editorial Analysis

The author analyzes the implications of the new fiscal rule on Budget 2026, focusing on the impact of fiscal consolidation on development expenditures and investments. He raises concerns about the potential negative effects of reducing agricultural and rural expenditures.

Main Arguments:

New fiscal rule: The new fiscal rule targets a debt-GDP ratio of around 50% by 2031, allowing for a higher debt-GDP ratio compared to the FRBM Act. This provides greater fiscal space to the government.
Fiscal consolidation: The government aims to reduce its debt ratio by reducing primary and fiscal deficits. This reduction is achieved by a more than proportionate fall in the share of total expenditure in GDP.
Burden on development expenditures: The burden of adjustment of this reduction in total expenditures has fallen on development expenditures, especially in rural development and agriculture. This may have negative consequences for investments and the distribution of growth.

Counter Arguments:

The government may argue that fiscal consolidation is necessary to maintain macroeconomic stability and attract investments. However, the author argues that the reduction in development expenditures may have negative consequences for growth and equity.
The government may also argue that the new fiscal rule provides greater fiscal space and allows for more flexibility in spending. However, the author argues that the focus on debt reduction may lead to cuts in essential development programs.

Conclusion

While meeting its debt targets, the present fiscal strategy has largely bypassed these two challenges.

Policy Implications

The government needs to reconsider its fiscal strategy and ensure that fiscal consolidation does not come at the expense of development expenditures and investments. This may involve finding alternative sources of revenue and prioritizing investments in sectors that promote inclusive growth.

The article discusses the impact of the new fiscal policy rule on Budget 2026. The new rule targets a debt-GDP ratio of around 50% by 2031, allowing for a higher debt-GDP ratio compared to the FRBM Act. The government aims to reduce its debt ratio by reducing primary and fiscal deficits. This reduction is achieved by a more than proportionate fall in the share of total expenditure in GDP, particularly in revenue expenditure. The burden of adjustment has fallen on development expenditures, especially in rural development and agriculture. The author raises concerns about the impact of this fiscal consolidation strategy on investments and the distribution of growth, as the reduction in agricultural and rural expenditures may nullify the positive effects of tax reductions.

Key Facts

Debt-GDP ratio target: 50% by 2031

Primary deficit FY27: 0.7% of GDP

Fiscal deficit FY27: 4.3% of GDP

UPSC Exam Angles

GS Paper 3 (Economy): Fiscal policy, government budgeting

Connects to syllabus topics like government debt, fiscal responsibility, and economic development

Potential question types: Statement-based MCQs, analytical mains questions on fiscal consolidation

Visual Insights

More Information

Background

The FRBM Act (Fiscal Responsibility and Budget Management Act) was enacted in India in 2003 to ensure fiscal discipline and reduce the country's debt burden. The Act set targets for reducing the fiscal deficit and eliminating the revenue deficit. It aimed to promote greater transparency in fiscal operations and encourage a more responsible approach to public finance management. The original act has been amended several times since its inception to adapt to changing economic conditions. The evolution of fiscal policy in India can be traced back to the post-independence era, with various committees and commissions recommending measures for fiscal consolidation. The Planning Commission played a significant role in shaping the country's economic policies, including fiscal management. Over time, the focus shifted from development spending to fiscal prudence, particularly in the context of economic reforms and globalization. The FRBM Act represents a key milestone in this evolution, formalizing the commitment to fiscal discipline through legislative measures. The legal and constitutional framework for fiscal policy in India is primarily governed by the Constitution of India and various financial laws. Article 112 of the Constitution mandates the presentation of the Union Budget before the Parliament, outlining the government's revenue and expenditure proposals. The FRBM Act provides a statutory framework for fiscal responsibility, setting targets for deficit reduction and debt management. The Finance Commission, a constitutional body, also plays a crucial role in recommending principles for the distribution of tax revenues between the Union and the States.

Latest Developments

Recent government initiatives have focused on boosting economic growth while maintaining fiscal prudence. The government has emphasized increasing capital expenditure to stimulate investment and create jobs. Schemes like PM Gati Shakti National Master Plan aim to improve infrastructure and reduce logistics costs. These initiatives are designed to enhance the country's long-term growth potential. There are ongoing debates about the appropriate level of fiscal deficit and debt for India. Some economists argue for a more relaxed fiscal stance to support growth, while others emphasize the importance of fiscal consolidation to maintain macroeconomic stability. Institutions like the Reserve Bank of India (RBI) play a crucial role in managing inflation and ensuring financial stability, which are essential for sustainable growth. The future outlook for fiscal policy in India involves balancing the need for growth with the imperative of fiscal sustainability. The government aims to achieve a debt-GDP ratio of around 50% by 2031, as mentioned in the article. This target reflects a commitment to reducing the country's debt burden over the medium term. Achieving this goal will require careful management of government spending and revenue mobilization.

Frequently Asked Questions

1. What is the debt-GDP ratio target set in Budget 2026, and by what year is it aimed to be achieved?

The Budget 2026 aims for a debt-GDP ratio of around 50% by 2031.

Exam Tip

Remember the target year (2031) and the percentage (50%) for Prelims.

2. What are the primary and fiscal deficit targets for FY27 as mentioned in the article?

As per the article, the primary deficit target for FY27 is 0.7% of GDP, and the fiscal deficit target is 4.3% of GDP.

Exam Tip

These figures are important for Prelims. Remember primary deficit is lower than fiscal deficit.

3. What is the FRBM Act, and why is it relevant to the discussion on Budget 2026?

The FRBM Act (Fiscal Responsibility and Budget Management Act), enacted in 2003, aimed to ensure fiscal discipline and reduce India's debt burden. Budget 2026's new fiscal rule allows for a higher debt-GDP ratio than the FRBM Act originally envisioned, making it a point of comparison.

4. How does Budget 2026 aim to reduce the debt-GDP ratio?

Budget 2026 aims to reduce its debt ratio by reducing primary and fiscal deficits. This reduction is achieved by a more than proportionate fall in the share of total expenditure in GDP, particularly in revenue expenditure.

5. What are the potential negative consequences of Budget 2026's fiscal consolidation strategy, according to the author?

The author is concerned that the reduction in agricultural and rural expenditures may nullify the positive effects of tax reductions and negatively impact investments and the distribution of growth.

6. Why is the reduction in development expenditures, particularly in rural development and agriculture, a concern?

The reduction in these expenditures could negatively impact investments and the distribution of growth, potentially nullifying the positive effects of other economic measures.

7. What recent developments or government initiatives are related to Budget 2026's fiscal policy?

Recent government initiatives have focused on boosting economic growth while maintaining fiscal prudence, increasing capital expenditure, and implementing schemes like PM Gati Shakti National Master Plan to improve infrastructure.

8. Why is Budget 2026's approach to fiscal consolidation being discussed in the news?

Budget 2026's approach is being discussed because it involves a significant reduction in development expenditures to meet fiscal targets, raising concerns about its impact on economic growth and social welfare.

9. What is 'fiscal deficit'?

Fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowings). It indicates the total borrowing requirements of the government.

10. What is the significance of the year 2003 in the context of Indian fiscal policy?

The year 2003 is significant because the FRBM Act (Fiscal Responsibility and Budget Management Act) was implemented in India during that year, aiming to bring fiscal discipline.

Practice Questions (MCQs)

1. Consider the following statements regarding the Fiscal Responsibility and Budget Management (FRBM) Act, 2003: 1. It mandates the central government to reduce the fiscal deficit to 3% of GDP. 2. It aims to eliminate the revenue deficit. 3. The Act has never been amended since its enactment. Which of the statements given above is/are correct?

A.1 and 2 only
B.2 only
C.1 and 3 only
D.1, 2 and 3

Show Answer

Answer: A

Statement 1 is CORRECT: The FRBM Act 2003 did mandate the central government to reduce the fiscal deficit to 3% of GDP, although this target has been revised over time. Statement 2 is CORRECT: The FRBM Act aimed to eliminate the revenue deficit. Statement 3 is INCORRECT: The FRBM Act has been amended several times since its enactment in 2003 to adapt to changing economic conditions. Therefore, only statements 1 and 2 are correct.