27 Feb 2026·Source: The Indian Express

3 min

EconomyEXPLAINED

Budget 2026-27: Anchoring fiscal policy with debt targets

Q: What are the potential downsides or risks associated with aggressively pursuing this debt-to-GDP target?

Overly aggressive fiscal consolidation could lead to: * Reduced public investment: Cutting spending too sharply could hurt essential services and infrastructure development. * Slower economic growth: Reduced government spending could dampen demand and slow down economic activity. * Increased social inequality: Cuts to social programs could disproportionately affect vulnerable populations. Key points: Reduced public investment: Cutting spending too sharply could hurt essential services and infrastructure development.. Slower economic growth: Reduced government spending could dampen demand and slow down economic activity.. Increased social inequality: Cuts to social programs could disproportionately affect vulnerable populations.

Q: If UPSC asks a question about this, what specific number or term should I absolutely remember to avoid getting tricked?

Remember the target debt-to-GDP ratio of 50% +/-1% by 2030-31. A common trick would be to change the year or the percentage range. Also, remember that the FRBM Act didn't explicitly target debt levels. Exam tip: Focus on the target year and percentage range. Examiners may try to confuse you with older FRBM targets related to fiscal deficit.

Q: In a Mains answer, how can I 'critically examine' this new focus on debt targets? What opposing viewpoints should I include?

To critically examine, present both sides: * Arguments for: Improved fiscal sustainability, lower borrowing costs, increased investor confidence. * Arguments against: Risk of reduced public investment, slower economic growth if consolidation is too aggressive, potential impact on social programs. Also, acknowledge that India's debt context is different from developed economies. Key points: Arguments for: Improved fiscal sustainability, lower borrowing costs, increased investor confidence.. Arguments against: Risk of reduced public investment, slower economic growth if consolidation is too aggressive, potential impact on social programs. Exam tip: Structure your answer with clear 'for' and 'against' sections. Conclude by stating that a balanced approach is necessary.

Q: Which GS paper is this most relevant to, and what specific aspects should I focus on for that paper?

This is most relevant to GS Paper III (Economy). Focus on aspects related to: * Government budgeting and fiscal policy. * Economic growth and development. * Resource mobilization. * Impact of government policies on the economy. Key points: Government budgeting and fiscal policy.. Economic growth and development.. Resource mobilization.. Impact of government policies on the economy. Exam tip: Link this topic to broader discussions on inclusive growth and sustainable development goals.

India shifts fiscal strategy to target debt-to-GDP ratio by 2031.

Background Context

The shift towards focusing on public debt management involves setting specific annual targets for debt reduction. This approach is aimed at ensuring fiscal discipline and long-term economic stability.

Nominal GDP growth plays a crucial role in debt sustainability. Higher nominal GDP growth helps in reducing the debt-to-GDP ratio, making it easier for the government to manage its debt burden.

Managing public debt effectively can lead to lower servicing costs. Lower debt servicing costs free up resources that can be used for developmental activities and essential public services.

Why It Matters Now

The central government's decision to focus on public debt is particularly relevant now due to the high levels of sovereign debt. Addressing this issue is crucial for maintaining investor confidence and ensuring sustainable economic growth.

High debt levels can impact the government's ability to respond to economic shocks. Reducing the debt burden provides the government with greater fiscal space to implement counter-cyclical measures during economic downturns.

This shift in fiscal strategy aligns with recommendations from fiscal responsibility committees. Implementing these recommendations can enhance the credibility and effectiveness of fiscal policy.

Key Takeaways

•The central government is prioritizing public debt management by setting debt targets.
•The goal is to achieve a debt-to-GDP ratio of 50% +/- 1% by 2030-31.
•Nominal GDP growth is essential for achieving debt sustainability.
•High sovereign debt (Centre and States) is currently at 83% of GDP.
•Effective debt management can reduce debt servicing costs.
•The Fiscal Responsibility and Budget Management Review Committee recommended this shift in strategy.
•Focusing on debt targets aims to enhance fiscal discipline and long-term economic stability.

Different Perspectives

•Some economists argue that focusing solely on debt targets may limit the government's ability to invest in crucial infrastructure and social programs.
•Others believe that prioritizing debt reduction is essential for maintaining macroeconomic stability and attracting foreign investment.
•There are differing views on the optimal level of public debt, with some advocating for higher levels of debt to finance growth-enhancing projects.

Related Concepts

Fiscal Responsibility and Budget Management (FRBM) Act Debt-to-GDP ratio Nominal GDP growth Sovereign debt Fiscal deficit

The central government is shifting its fiscal strategy to prioritize public debt management, targeting a debt-to-GDP ratio of 50% +/-1% by 2030-31. This change aligns with the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee. Achieving this target hinges on maintaining strong nominal GDP growth to ensure debt sustainability.

Currently, the combined debt of the central and state governments amounts to approximately 83% of GDP, with states accounting for about 28%. High debt levels increase debt servicing costs, potentially reducing productive investments in sectors like health and education. Divestment is considered crucial for balancing employment, social spending, and revenue growth.

The government also views free trade agreements, including potential deals with China, as important for expanding market access and leveraging comparative advantages.

UPSC Exam Angles

GS Paper III: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Connects to the syllabus topics of government budgeting, fiscal policy, and macroeconomic stability.

Potential question types: analytical questions on the impact of fiscal policy on economic growth, critical evaluation of the FRBM Act, and descriptive questions on the challenges of managing public debt in India.

In Simple Words

The government is trying to get its finances in better shape by focusing on how much it owes. It wants to bring down the total debt compared to the size of the economy by 2030-31. This is like trying to pay off your home loan faster so you have more money later.

India Angle

In India, this means the government will try to borrow less and manage its spending better. This could affect how much money is available for things like roads, schools, and healthcare in the future.

For Instance

Think of it like a family that has a lot of credit card debt. They decide to focus on paying off the debt instead of just making minimum payments. This frees up more money in the long run.

If the government manages its debt well, it can spend more on things that improve people's lives. This can lead to a stronger economy and better opportunities for everyone.

Less government debt today means more money for you tomorrow.

The central government is changing its fiscal strategy to focus on public debt, aiming for a debt-to-GDP ratio of 50% +/-1% by 2030-31. This shift, recommended by the Fiscal Responsibility and Budget Management Review Committee, emphasizes managing public debt with specific annual targets. Nominal GDP growth is crucial for debt sustainability.

States' debt, about 28% of GDP, combined with the Centre's, puts overall sovereign debt at 83% of GDP. High debt leads to higher servicing costs, impacting productive investments like health and education. Divestment is key to balancing employment, social spending, and revenue growth.

Free trade pacts, including potential deals with China, are important for market access and leveraging comparative advantages.

Expert Analysis

The government's focus on managing public debt and targeting a specific debt-to-GDP ratio highlights several key economic concepts. The targeted debt-to-GDP ratio of 50% +/-1% by 2030-31 is a direct attempt to improve fiscal sustainability. Fiscal sustainability refers to the government's ability to maintain its spending and debt levels without threatening its long-term solvency. A high debt-to-GDP ratio can signal potential risks to investors and creditors, leading to higher borrowing costs and potentially hindering economic growth. By aiming for a lower ratio, the government seeks to create a more stable and predictable economic environment.

The Fiscal Responsibility and Budget Management (FRBM) Act, initially enacted in 2003, plays a crucial role in this strategy. The FRBM Act aimed to institutionalize fiscal discipline, reduce India's fiscal deficit, and improve macroeconomic management. The FRBM Review Committee, whose recommendations are now being implemented, was set up to assess the effectiveness of the original act and suggest improvements. The committee's emphasis on a debt target, rather than just a deficit target, reflects a more comprehensive approach to fiscal management, recognizing that debt levels have long-term implications for the economy.

Nominal GDP growth is explicitly mentioned as crucial for debt sustainability, highlighting the importance of economic growth in managing public debt. Nominal GDP growth reflects the overall increase in the value of goods and services produced in an economy, including both real growth and inflation. Higher nominal GDP growth makes it easier for the government to service its debt, as it increases the tax base and generates more revenue. Conversely, a slowdown in economic growth can make debt management more challenging, potentially leading to higher debt levels and increased fiscal stress.

Finally, the emphasis on divestment and free trade agreements reflects the government's broader strategy for achieving fiscal consolidation and promoting economic growth. Divestment, or the sale of government-owned assets, can generate revenue that can be used to reduce debt or finance productive investments. Free trade agreements can boost exports, attract foreign investment, and promote economic growth by providing access to larger markets and reducing trade barriers. The mention of potential deals with China underscores the importance of leveraging international trade to support India's economic development and fiscal sustainability.

For UPSC aspirants, understanding these concepts is crucial for both prelims and mains. Prelims questions can focus on the FRBM Act, debt-to-GDP ratios, and the impact of economic growth on fiscal sustainability. Mains questions can explore the challenges of managing public debt in India, the role of fiscal policy in promoting economic growth, and the implications of free trade agreements for India's economy.

Visual Insights

Key Fiscal Targets and Indicators

Highlights the government's fiscal policy focus on debt management and key economic indicators.

Debt-to-GDP Ratio Target by 2030-31: 50% +/-1%
States' Debt (as % of GDP): 28%
Overall Sovereign Debt (as % of GDP): 83%

Frequently Asked Questions

1. Why is the government suddenly so focused on a specific debt-to-GDP ratio now, after not explicitly targeting it in the FRBM Act 2003?

The shift reflects a growing awareness of the impact of high debt levels on economic stability. While the FRBM Act focused on fiscal and revenue deficits, it didn't directly address the overall debt burden. The COVID-19 pandemic significantly increased government borrowing, highlighting the need for a more explicit debt management strategy to ensure long-term fiscal sustainability.

2. What's the difference between targeting a fiscal deficit and targeting a debt-to-GDP ratio? Aren't they essentially the same thing?

No, they are related but distinct. A fiscal deficit is the difference between government spending and revenue in a given year. It contributes to the overall debt. The debt-to-GDP ratio is a cumulative measure of all past deficits (and surpluses) relative to the size of the economy. Targeting the debt-to-GDP ratio provides a longer-term perspective on fiscal sustainability.

3. How will achieving this debt-to-GDP target of 50% +/-1% by 2031 actually affect the average Indian citizen?

A lower debt-to-GDP ratio can lead to several positive outcomes: * More resources for social programs: Reduced debt servicing costs free up funds for investments in health, education, and infrastructure. * Greater economic stability: Lower debt reduces the risk of economic crises and enhances investor confidence. * Lower borrowing costs: As government debt decreases, the interest rates on government borrowing may also fall, benefiting businesses and individuals.

•More resources for social programs: Reduced debt servicing costs free up funds for investments in health, education, and infrastructure.
•Greater economic stability: Lower debt reduces the risk of economic crises and enhances investor confidence.
•Lower borrowing costs: As government debt decreases, the interest rates on government borrowing may also fall, benefiting businesses and individuals.

4. What are the potential downsides or risks associated with aggressively pursuing this debt-to-GDP target?

Overly aggressive fiscal consolidation could lead to: * Reduced public investment: Cutting spending too sharply could hurt essential services and infrastructure development. * Slower economic growth: Reduced government spending could dampen demand and slow down economic activity. * Increased social inequality: Cuts to social programs could disproportionately affect vulnerable populations.

•Reduced public investment: Cutting spending too sharply could hurt essential services and infrastructure development.
•Slower economic growth: Reduced government spending could dampen demand and slow down economic activity.
•Increased social inequality: Cuts to social programs could disproportionately affect vulnerable populations.

5. How does India's current debt-to-GDP ratio of 83% compare to other major economies? Is this alarmingly high?

A debt-to-GDP ratio of 83% is relatively high compared to some developed economies, but not uncommon for emerging markets. The key is not just the level of debt, but also the country's ability to service it, which depends on factors like economic growth, interest rates, and revenue generation.

6. The article mentions 'divestment' as crucial. What specific divestments are likely, and how will they help achieve the debt target?

Divestment refers to the government selling its stakes in Public Sector Undertakings (PSUs). The proceeds from these sales can be used to reduce government debt. While specific divestment targets are not mentioned, sectors like banking, energy, and infrastructure are often considered for divestment.

7. How do Free Trade Agreements (FTAs) relate to this debt-to-GDP target? It seems like an indirect connection.

FTAs can boost exports and economic growth, leading to higher government revenues. Increased revenues can then be used to reduce the fiscal deficit and, consequently, the debt-to-GDP ratio. The connection is indirect but significant, as FTAs contribute to overall economic strength and fiscal sustainability.

8. If UPSC asks a question about this, what specific number or term should I absolutely remember to avoid getting tricked?

Remember the target debt-to-GDP ratio of 50% +/-1% by 2030-31. A common trick would be to change the year or the percentage range. Also, remember that the FRBM Act didn't explicitly target debt levels.

Exam Tip

Focus on the target year and percentage range. Examiners may try to confuse you with older FRBM targets related to fiscal deficit.

9. In a Mains answer, how can I 'critically examine' this new focus on debt targets? What opposing viewpoints should I include?

To critically examine, present both sides: * Arguments for: Improved fiscal sustainability, lower borrowing costs, increased investor confidence. * Arguments against: Risk of reduced public investment, slower economic growth if consolidation is too aggressive, potential impact on social programs. Also, acknowledge that India's debt context is different from developed economies.

•Arguments for: Improved fiscal sustainability, lower borrowing costs, increased investor confidence.
•Arguments against: Risk of reduced public investment, slower economic growth if consolidation is too aggressive, potential impact on social programs.

Exam Tip

Structure your answer with clear 'for' and 'against' sections. Conclude by stating that a balanced approach is necessary.

10. Which GS paper is this most relevant to, and what specific aspects should I focus on for that paper?

This is most relevant to GS Paper III (Economy). Focus on aspects related to: * Government budgeting and fiscal policy. * Economic growth and development. * Resource mobilization. * Impact of government policies on the economy.

•Government budgeting and fiscal policy.
•Economic growth and development.
•Resource mobilization.
•Impact of government policies on the economy.

Exam Tip

Link this topic to broader discussions on inclusive growth and sustainable development goals.

Practice Questions (MCQs)

1. Consider the following statements regarding the Fiscal Responsibility and Budget Management (FRBM) Act: 1. The FRBM Act mandates the central government to reduce the fiscal deficit to 3% of GDP. 2. The FRBM Review Committee recommended targeting a debt-to-GDP ratio instead of solely focusing on the fiscal deficit. 3. The FRBM Act explicitly addresses the debt levels of state governments. Which of the statements given above is/are correct?

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

Show Answer

Answer: C

Statement 1 is CORRECT: The FRBM Act initially mandated 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 Review Committee recommended shifting the focus to targeting a debt-to-GDP ratio to ensure long-term fiscal sustainability. Statement 3 is INCORRECT: While the FRBM Act focuses primarily on the central government's fiscal responsibility, it does not explicitly address the debt levels of state governments, although their debt is a factor in overall fiscal management.

2. In the context of public debt management, what is the significance of nominal GDP growth? A) It directly reduces the principal amount of outstanding debt. B) It increases the tax base and generates more revenue, making it easier to service debt. C) It automatically lowers interest rates on government borrowing. D) It has no impact on the government's ability to manage its debt.

Show Answer

Answer: B

Nominal GDP growth is crucial for debt sustainability because it increases the tax base and generates more revenue. This makes it easier for the government to service its debt obligations without resorting to excessive borrowing or cutting essential spending. Higher nominal GDP growth reflects a stronger economy, which improves the government's fiscal position.

3. Which of the following measures is NOT typically considered a strategy for fiscal consolidation? A) Increasing tax revenues through improved tax administration. B) Reducing government spending on non-essential programs. C) Implementing expansionary monetary policy to stimulate economic growth. D) Divesting government-owned assets to generate revenue.

Show Answer

Answer: C

Expansionary monetary policy, which involves lowering interest rates and increasing the money supply, is primarily used to stimulate economic growth and is not directly related to fiscal consolidation. Fiscal consolidation focuses on reducing government debt and deficits through measures such as increasing tax revenues, reducing government spending, and divesting assets.