9. Fiscal Strategy 2026-27: Transitioning to a Debt-to-GDP Anchor

Union Budget 2026-27 signals a landmark shift in India’s fiscal architecture, moving away from annual fiscal deficit targeting to a medium-term Debt-to-GDP ratio as the primary \'guiding light.\' This transition aims to enhance macroeconomic resilience against global shocks while ensuring long-term debt sustainability. • The Shift in Fiscal Anchor: The government has formally transitioned from focusing on annual fiscal deficit reduction to a Debt-to-GDP regime. This provides the Centre more discretion to employ counter-cyclical fiscal support during global economic uncertainties without being constrained by rigid annual deficit ceilings. • Target Debt Trajectory: The central government’s debt is estimated at 55.6% of nominal GDP for FY27, a decline from the 56.1% revised estimate for FY26. The long-term goal is to bring this ratiodown to 50% (±1%) by FY31, ensuring that interest payments do not pre-empt resources for priority sectors. • Fiscal Deficit Normalization: The fiscal deficit for FY27 is pegged at 4.3% of GDP, a slight reduction from the 4.4% in FY26. While the pace of consolidation has moderated (only 10 basis points), it reflects the fulfillment of the 2021-22 commitment to bring the deficit below 4.5% by FY26. • Nominal GDP and Growth Assumptions: The fiscal math is built on a projected 10% nominal GDP growth, taking the economy to ₹393 trillion. This conservative assumption provides a buffer, as higher actual growth could lead to a faster-thananticipated reduction in the debt ratio. • Navigating Global Risks: The Fiscal Policy Strategy Statement explicitly flags risks from high US tariffs and geopolitical tensions. The new debtanchored approach is designed to build \'macro-economic buffers\' that allow India to absorb supply chain disruptions and trade shocks without halting domestic investment. • Capex Push vs. Revenue Moderation: To drive this trajectory, the budget proposes an 11.5% increase in Capital Expenditure (to ₹12.2 trillion) while moderating revenue expenditure growth to 6.6%. This \'quality of spending\' approach ensures that borrowed funds create productive assets rather than just meeting consumption needs. Key Definitions • Fiscal Anchor: A specific numerical target (like Debt-to-GDP or Fiscal Deficit) used by a government to signal its commitment to fiscal discipline and to guide policy decisions. • Debt-to-GDP Ratio: The ratio of a country\'s public debt to its gross domestic product (GDP). It indicates the ability of an economy to pay back its debt; a declining ratio suggests debt is becoming more manageable. • Counter-cyclical Fiscal Support: A strategy where the government increases spending or reduces taxes during an economic downturn (and vice versa) to stabilize the economy. • Primary Deficit: The fiscal deficit minus interest payments on previous borrowings. It shows the current year\'s fiscal balance without the burden of past liabilities. Constitutional and Legal Provisions • Article 292: Empowers the Union Government to borrow upon the security of the Consolidated Fund of India within limits fixed by Parliament. • FRBM Act, 2003: The Fiscal Responsibility and Budget Management Act provides the legal framework for fiscal discipline. The 2018 amendment (based on N.K. Singh Committee) mandated a 40% debt-toGDP target for the Centre, which is currently being recalibrated toward the 50% target for 2031. • Fiscal Policy Strategy Statement: A mandatory document under the FRBM Act, presented with the budget, outlining the government\'s fiscal priorities and risk assessments. • Article 280: The Finance Commission (currently the 16th FC) recommends the glide path for fiscal consolidation and debt management for both Centre and States. Additional Keypoints for Analysis • N.K. Singh Committee: Recommended using debt as the primary target for fiscal policy, suggesting a 60% combined limit (40% Centre, 20% States). • Interest Burden: Currently, interest payments consume nearly 25% of total expenditure. Reducing the debt ratio is vital to free up this \'interest-locked\' capital for health and education. • Sovereign Rating: The shift to a debt anchor is a signal to global rating agencies (like Moody’s and S&P) about India\'s commitment to long-term solvency, which could lead to further rating upgrades. ConclusionThe adoption of a Debt-to-GDP anchor marks the maturation of India’s fiscal policy. By prioritizing the \'stock of debt\' over the \'flow of deficit,\' the government is opting for a more sophisticated, flexible, and sustainable path. This ensures that while India remains a high-growth economy, it does not fall into a debt trap, maintaining the delicate balance between necessary public investment and fiscal prudence. UPSC Relevance • GS Paper III: Indian Economy (Government Budgeting; Issues relating to mobilization of resources; Fiscal Policy). • GS Paper II: Important aspects of governance (Transparency and accountability in fiscal management). • Prelims: FRBM Act targets; Debt-to-GDP projections for FY27 and FY31; Primary Deficit vs. Fiscal Deficit; N.K. Singh Committee recommendations.