Author: Aashiya Jain | EQMint | Finance News

 

In a significant policy move, India’s Finance Minister Nirmala Sitharaman has announced that the government will make reducing the debt to GDP ratio a central economic priority starting with the next fiscal year, which begins on April 1, 2026. This development marks a strategic pivot in India’s fiscal management, focusing on long term sustainability and macroeconomic stability amid global uncertainties and domestic growth ambition.

 

The debt to GDP ratio is a key metric that compares a country’s total public debt to its economic output. It provides insight into the government’s ability to manage and repay its obligations. A lower ratio suggests that the economy is growing faster than debt accumulation, which typically improves investor confidence and reduces financing costs over time. In India’s case, the debt burden rose sharply during the COVID-19 pandemic due to increased government spending to support health, welfare, and economic stimulus measures. While this response helped maintain demand and protect livelihoods, it also pushed up debt levels, raising concerns about fiscal sustainability.

 

Policy Shift: From Annual Deficit Targets to Long-Term Debt Management

Traditionally, India’s fiscal policy prioritized fiscal deficit targets the gap between the government’s revenue and expenditure each year as the main operational anchor. However, the shift announced by the finance minister implies a move towards a broader, more enduring measure of fiscal health. Rather than focusing narrowly on yearly deficit figures, the government will now emphasize a multi-year strategy aimed at steadily reducing the overall debt relative to the size of the economy.

 

This shift aligns India with global best practices, where many advanced economies use debt-to-GDP ratios as a key benchmark for fiscal discipline. It reflects recognition that sustainable public finances require managing cumulative liabilities as well as annual balances. By focusing on the debt ratio, policymakers aim to ensure that future generations are not unduly burdened by long-term obligations while preserving the state’s capacity to invest in growth enhancing areas like infrastructure, education, and health.

 

Roadmap and Targets

The government’s fiscal blueprint, laid out in the Union Budget 2025-26, indicates a deliberate glide path for debt reduction over the medium term. Central government debt, estimated at around approximately 57 per cent of GDP in 2024-25 and expected to remain slightly lower in 2025-26, is projected to decrease gradually by 2031. The official strategy targets bringing down the ratio to around 50 per cent (plus or minus one percentage point) by March 31, 2031.

 

To achieve this, the government has outlined scenarios based on different nominal GDP growth rates (e.g., 10 per cent to 11 per cent). Under each scenario, a corresponding reduction in debt relative to GDP is envisaged through prudent deficit management and strong economic growth. The Fiscal Responsibility and Budget Management (FRBM) framework will continue to guide this process, but with nuanced adjustments to incorporate the structural focus on debt sustainability.

 

Why This Matters

A lower debt-to-GDP ratio carries several benefits for India’s economy:

 

• • Enhanced Investor Confidence: Investors and rating agencies closely monitor public debt levels. A clearly articulated plan to reduce debt can support credit rating stability and even upgrades, which in turn lowers borrowing costs for the government and private sector alike.

• • Fiscal Space for Growth: With a declining debt ratio, the government can maintain flexibility to respond to future crises without resorting to excessive borrowing. It also allows for sustained investments in infrastructure and public services that underpin long-term growth.

• • Lower Interest Burden: Over time, reduced debt levels can help to lower interest payments, freeing up resources for productive expenditure rather than servicing liabilities.

Conclusion

India’s decision to prioritize reducing the debt-to-GDP ratio from the next fiscal year marks an important evolution in fiscal policy. It underscores the government’s commitment to long-term economic stability, fiscal prudence and resilience against future shocks. If executed effectively, this strategy could bolster India’s macroeconomic fundamentals, enhance investor trust and underpin sustainable growth for years to come.

 

Resource link: Retruters