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Shift to Debt-GDP Ratio from Fiscal Deficit as Fiscal Anchor

Last updated on February 7th, 2025 Posted on February 6, 2025 by NEXT IAS Current Affairs Team  4384

Syllabus: GS3/ Economy

Context

  • The central government has announced a shift towards the “debt-GDP ratio” as the fiscal anchor, beginning from the 2026-27 financial year.

About

  • The government has detailed three levels of fiscal consolidation based on nominal GDP growth assumptions:
    • Mild: 10% growth rate
    • Moderate: 10.5% growth rate
    • High: 11% growth rate
  • Debt-GDP ratio in India: For the central government, the ratio is estimated to be 57.1% in 2024-25 and 56.1% in 2025-26.
    • The government aims to reduce the debt-GDP ratio to 50±1 per cent by 2031. 
Shift-to-Debt-GDP-Ratio-from-Fiscal-Deficit-as-Fiscal-Anchor

Rationale Behind the Shift

  • Enhanced Transparency and Flexibility: Unlike rigid annual fiscal deficit targets, the debt-GDP ratio provides a more comprehensive and long-term perspective of fiscal health.
  • Alignment with Global Best Practices: Many advanced economies prioritize debt sustainability over annual deficit targets, ensuring that fiscal policies remain adaptable to changing economic conditions.
  • Better Fiscal Management: This approach allows governments to rebuild financial buffers and allocate resources efficiently for growth-enhancing expenditures.
  • Disclosure of Off-Budget Borrowings: The new approach aims to bring greater clarity and transparency in government borrowings, addressing past concerns about fiscal opacity.

Challenges 

  • FRBM Act Compliance: The new framework suggests a significant delay in achieving the Fiscal Responsibility and Budget Management (FRBM) Act target of 40% debt-GDP ratio.
  • Implementation Challenges: Maintaining fiscal discipline while ensuring adequate public expenditure for economic growth remains a challenge.
  • State Debt Burden: The total debt burden, including states, remains a concern, necessitating coordinated fiscal consolidation.

Concluding remarks

  • The shift to the debt-GDP ratio as a fiscal anchor marks a significant change in India’s fiscal policy framework. 
  • While it offers greater flexibility and long-term sustainability, effective implementation and adherence to fiscal discipline will be crucial in achieving the targeted fiscal consolidation.
NK Singh committee recommendation
– Debt to GDP ratio: The Committee suggested using debt as the primary target for fiscal policy. A debt to GDP ratio of 60% should be targeted with a 40% limit for the center and 20% limit for the states by FY23.
– The fiscal deficit to GDP ratio of 2.5% by FY23.
– Fiscal Council: The Committee proposed to create an autonomous Fiscal Council with a Chairperson and two members appointed by the center. The role of the Council would include:
1. Preparing multi-year fiscal forecasts, 
2. Recommending changes to the fiscal strategy, 
3. Improving quality of fiscal data, 
4. Advising the government if conditions exist to deviate from the fiscal target.
– Deviations: The Committee suggested that grounds in which the government can deviate from the targets should be clearly specified, and the government should not be allowed to notify other circumstances.
– Debt trajectory for individual states: The Committee recommended that the Finance Commission should be asked to recommend the debt trajectory for individual states. 

Source: IE

 
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