Minister Nirmala Sitharaman – THE CENTRE’S fiscal arithmetic is set to see a significant transition with the operational target for fiscal consolidation moving to debt-to-GDP ratio instead of fiscal deficit as Finance Minister Nirmala Sitharaman will present her ninth consecutive Budget on Sunday. While the government had stated its intent to shift to the new fiscal guidance metric, the Budget would be the first to detail the fine print linked to the new anchor for a full financial year, 2026-27. Policy makers in the government are of the view that this change, which is in line with global practice, will lend the government more space to enhance its development spending.

Further, they see the pace of fiscal consolidation to be more gradual. The Centre has projected the debt-to-GDP ratio to decline to 50±1% by March 2031 from an estimated 56.

1% in March 2026. Most economists estimate the Centre to peg it at 55% of the GDP for FY27 in the Budget.

“Globally, anchoring fiscal policy to the debt-to-GDP ratio provides governments with flexibility to respond to economic shocks, while maintaining long-term sustainability. In India, we believe this could help rebuild buffers and provide policymakers with the space for growth-enhancing expenditures as and when needed,” UBS Securities India said in a recent note. The debt-to-GDP ratio will be contingent upon nominal GDP growth, which forms the basis of the ratio, along with the government’s borrowing and repayment obligations.

The increase in the government’s financial burden in the years to come will also be a factor once the 8th Pay Commission recommendations get implemented. For instance, with a goal of achieving 50±1% debt-to-GDP ratio by March 2031, a one percentage point reduction in the ratio every year would translate into a fiscal deficit of 4. 2% of GDP in FY27.

Even this level of fiscal deficit implies high gross borrowings in view of the repayment trajectory for coming years, ICICI Bank Economic Research said in a note. Story continues below this ad After a digression during the Covid-19 pandemic, the Centre’s focus on fiscal consolidation has been steady. The Economic Survey for 2025-26, presented in Parliament on Friday, said India has reduced its general government debt-to-GDP ratio by approximately 7.

1 percentage points since 2020, while sustaining high public investment. Going forward, the Survey said, the Central government’s credible medium-term goal to converge towards a debt-to-GDP ratio of 50±1% provides the policy anchor for sustaining this consolidation at the general government level as well.

Also Read | Budget 2026: To make India a Global Critical Mineral Powerhouse General government debt, which refers to the debt of both states and the Centre, is the metric observed by global rating agencies to assess the fiscal health of the country. While the Centre will detail its fiscal numbers linked to the debt-to-GDP ratio, the role of states in managing their public finances is seen facing greater scrutiny.

When asked whether the states also need an explicit debt reduction target like the Centre, Chief Economic Advisor V Anantha Nageswaran in a post-Survey interview to The Indian Express, said there is a need to reflect and decide what is the right metric for states and what will work, especially after seeing the Finance Commission recommendations. “We need to do some scenario analysis (to see) which one plays out better than the other, etc, and come to a considered decision.

In any case, in a few days, we will also see the 16th Finance Commission’s report being tabled. So, I think it’s not necessary at this stage to speculate before hearing what the Finance Commission has to say. After that, too, we need to do some more empirical work and scenario planning before we respond as to which is the right fiscal parameter to target,” the CEA said.

The recommendations of the 16th Finance Commission, which would be effective from financial years 2026-27 to 2030-31, and the details regarding tax devolution and other revenue sharing mechanisms, would be known after the presentation of the Budget on Sunday. Story continues below this ad As states account for a significant share of general government debt, state budgets should explicitly chart medium-term, preferably scenario-based, debt-to-GSDP trajectories, aligned with realistic growth assumptions and development needs, rather than relying solely on annual deficit targets, State Bank of India’s Group Chief Economic Advisor Soumya Kanti Ghosh said in a recent note.

Ghosh said the debt situation seen during 2000-2005 was reversed during 2015-2020 and to some extent in 2020-2025. “While the Centre was the major contributor to overall debt during the first period, states contributed majorly to second period. however to be fair to states, such an increase in state debt was also because of the power sector reforms (UDAY) in 2015 when the debt was taken over by the states,” he said.

The Reserve Bank of India (RBI) has already called on states to target a reduction in their debt levels just as the Central government has done as “high level of debt comes in the way of investment and growth”. In its study of states’ budgets for 2025-26, released earlier this month, the RBI warned that while the debt of all states put together had declined to 28. 1% of GDP by March 2024 from a peak of 31% as of March 2021, the figure is expected to rise to 29.

2% by the end of the current fiscal. Referring to the Centre’s stated intent to shift to a debt-to-GDP framework, the RBI had said that “highly leveraged States may also frame a clear glide path for debt consolidation”. States’ borrowings have risen significantly in the last two decades.

In the first half of the current fiscal, states borrowed 21% more compared to the same period of 2024-25 and are slated to borrow Rs 5 lakh crore in the current quarter that ends on March 31. Story continues below this ad The Centre, on the other hand, is set to meet its commitment to keep the fiscal deficit below 4. 5% of the GDP by FY26 despite tax cuts.

Going ahead, while the government will get some fiscal breather with the debt-to-GDP ratio, the headwinds from the recent reductions in income tax and the Goods and Services Tax may weigh on the deficit projections, economists said. “We believe the government will look to target 55% of GDP as its debt target in FY27, which backs out to a deficit range of 4.

4% of GDP, depending on the mix of the government spending and nominal GDP growth assumption. The easing of monetary conditions will positively influence funding costs, but we believe the government is likely to be relatively cautious in its deficit projections,” BofA Securities’ economists Rahul Bajoria and Smriti Mehra said in a note.