Fiscal Policy Planning: Why India Needs a Clearer Medium-term Plan

Syllabus: GS3/Indian Economy

Context

• In the Union Budget 2026-27, the government has placed greater emphasis on the debt-to-GDP ratio, instead of focusing narrowly on the annual fiscal deficit.

About Fiscal Policy

• Fiscal policy refers to how the Government of India uses its budgetary tools i.e. revenue collection (taxes, non-tax receipts), expenditure, borrowing, and debt management.
• It aims to balance development priorities (infrastructure, health, education) with long-term sustainability (deficit management, debt control) while responding to domestic and global economic conditions.
• It is primarily articulated through the Annual Financial Statement (Union Budget) under Article 112 of the Constitution.
• A key indicator of fiscal health is the fiscal deficit (the gap between government expenditure and revenue) which directly adds to public debt.

Current Fiscal Position & Future Targets

• Fiscal Deficit & Debt: Fiscal deficit reduced from 9.2% of GDP in 2020-21 (pandemic year) to 4.4% in 2025-26.
  • Target for 2026-27: Fiscal deficit at 4.3% of GDP.
  • Central government debt-to-GDP ratio projected to decline from 56.1% in 2025-26 to 55.6% in 2026-27.
• Growth & Macroeconomic Environment: According to Economic Survey (2025-26):
  • Real GDP growth was estimated at about 7.4% for FY 2025–26, one of the highest among major economies.
  • Growth for FY 2026–27 is projected at 6.8–7.2%, underlining resilience despite global headwinds.
• Revenue & Expenditure Patterns: Tax revenues (direct & indirect) remain the core revenue source; efforts continue to improve tax buoyancy.
  • Non-tax revenues, notably dividends from the RBI and public sector entities are budgeted higher, providing additional fiscal space without raising taxes.
  • Capital expenditure is a strong priority, reaching a record ₹12.2 lakh crore (~₹12.2 trillion) in FY 2026–27, aimed at infrastructure and growth-oriented initiatives.

Major Concerns & Issues

• High Debt Levels Despite Consolidation: Even if the government achieves its target of reducing central government debt to 50±1% of GDP by 2030-31, debt will remain well above earlier benchmarks.
  • The FRBM framework had envisaged central government debt at 40% of GDP by 2025, implying a gap of nearly 10 percentage points even by 2031.
• Limited Ambition in the Near Term: Given stronger-than-expected economic growth, the government could have pursued faster consolidation.
  • It is especially relevant as future pressures loom, including:
    • Implementation of the Eighth Pay Commission;
    • Fiscal demands associated with a general election before 2030-31;
• General Government Debt Risks: State government debt is expected to rise, keeping general government debt close to 80% of GDP, potentially offsetting gains made at the central level while Union government debt may decline.

Key Policy Efforts & Initiatives

• Union Budget 2026–27 Strategy: It framed the fiscal approach around three pillars i.e. growth acceleration, aspirations of people, stability and sustainability of finances.
  • Enhanced Capital Expenditure: A record rise in capital expenditure, focusing on roads, railways, ports, urban & rural infrastructure, and logistics corridors (green & sustainable infrastructure).
    • It strengthens the supply side and employment generation.
  • Strategic Sector Support: Support to manufacturing, semiconductors, biopharma, electronics, and strategic minerals aims to boost productivity and reduce import dependence.
  • MSME & Enterprise Support: Enhanced liquidity and credit provision for MSMEs to drive employment and grassroots growth.
• Structural Reforms & Policy Initiatives:
  • Regulatory Reforms & Ease of Doing Business: The Economic Survey 2025-26 highlights continued efforts to simplify regulations and reduce compliance burdens across sectors, improving efficiency and domestic investment climate.
  • Labor Market & Skills Focus: Policy thrust on labor reforms and skill development continues, aiding formal employment and productivity.
  • State-Level Fiscal Health (Fiscal Health Index): The Fiscal Health Index initiative by NITI Aayog assesses state finances on indicators like tax buoyancy, debt sustainability, and expenditure quality.
    • It helps align state fiscal discipline with national goals.

Other Efforts & Initiatives

• Shift towards debt-to-GDP targeting rather than short-term deficit fixation.
• Gradual fiscal consolidation without abrupt expenditure cuts.
• Improvement in expenditure quality, supporting long-term growth.
• Signalling commitment to medium-term fiscal discipline to markets.
  • These efforts have helped restore credibility after the pandemic-induced fiscal expansion.

Way Forward

• Aim for a Primary Surplus: Running at least a small primary surplus (excluding interest payments) would accelerate debt reduction.
• Sustain High Nominal GDP Growth: Debt dynamics depend critically on growth remaining higher than interest rates.
• Coordinate Union–State Fiscal Consolidation: A comprehensive strategy covering both Centre and states is essential to reduce overall government debt.
• Account for Financing Constraints: With household financial savings at around 6% of GDP, rising government borrowing risks crowding out private investment and pushing up interest rates.
• Adopt Medium-Term Fiscal Planning: A transparent medium-term framework for general government finances would improve policy credibility and market confidence beyond annual Budgets.

Source: BS