India debt-to-GDP ratio: The Union government ended 2025-26 with a fiscal deficit of 4.4% of GDP and a debt-to-GDP ratio of 58.2%. The fiscal deficit has fallen sharply from the pandemic-era peak of 9.2% in 2020-21, while the decline in the debt ratio has been more modest. The debt-to-GDP ratio has fallen from the pandemic peak as well but is still more than the budget estimate of 56.1%, while the target for 2026-27 is 55.6%.
To achieve the debt-to-GDP ratio target, the government will have to pare the debt-to-GDP ratio by 2.6 percentage points in the current year. And that presents a problem as the two ratios were calculated on different GDP series.
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India changed the base year for its national accounts from 2011-12 to 2022-23 after the Union Budget for the current year was presented. The new series put nominal GDP for FY26 below the estimate used by the Budget. Since GDP forms the denominator of the debt-to-GDP ratio, the new series raised the ratio without requiring any increase in borrowing.
The 55.6% target for FY27 was set under the old series. The 58.2% FY26 outcome uses the new denominator. The Finance Ministry should therefore recalculate the debt path before treating the difference as fiscal slippage.
India debt-to-GDP ratio rests heavily on nominal growth
The fiscal deficit is less affected by this statistical problem. The Centre met its 4.4% target in FY26. The reduction from 9.2% in FY21 has been substantial.
The debt ratio is more dependent on nominal GDP. If output measured at current prices grows faster than debt, the ratio falls even while government liabilities continue to rise. Weak nominal growth makes the same stock of debt look heavier. A change in the GDP series can move the ratio again without any change in fiscal policy.
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FY27 has also brought costs that were not visible when the Budget was framed. The West Asia conflict has raised fuel and fertiliser prices. The Centre cut taxes on petrol and diesel to limit the increase in retail prices. Higher fertiliser import costs put pressure on the subsidy bill. The first measure reduces revenue while the second adds to expenditure.
The fiscal deficit target has been lowered further to 4.3% of GDP. A prolonged period of expensive oil or fertiliser would therefore require either additional revenue or lower expenditure elsewhere.
Fiscal deficit FY27 leaves less room for shocks
The April-June deficit of about ₹3.10 lakh crore offers little guidance on the full year. Government receipts and expenditure do not arrive evenly over four quarters. Transfers to states can also alter the quarterly deficit without saying much about the eventual annual number.
Fuel taxes and fertiliser subsidies give a better indication of the pressure on the Budget. Lower fuel duties reduce revenue for as long as the tax cut remains. A larger subsidy bill adds to expenditure. Receipts from stake sales can partly offset the loss in one financial year. They cannot finance expenditure that recurs every year.
The Economic Stabilisation Fund created in March gives the Centre a buffer when an external shock pushes spending above Budget assumptions. Once that money is drawn down, it does not solve a continuing gap between revenue and expenditure.
India is protected against some of the problems that have caused sovereign debt crises elsewhere. Most Union government debt is denominated in rupees and financed in the domestic market. Foreign-currency borrowing accounts for only a small part of the Centre’s liabilities. A fall in the rupee therefore does not automatically enlarge most of the government’s debt stock.
There is still a budgetary cost. Interest has to be paid before the government decides how much it can spend on new programmes or investment. As that bill rises, a revenue shortfall leaves fewer choices.
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Fiscal consolidation India has to protect useful investment
The Centre has continued to spend heavily on capital projects while reducing the fiscal deficit. That choice deserves to be retained where the projects are sound. Borrowing for a railway line or a power network can add to future output and tax receipts.
Budget classification alone does not make capital expenditure productive. A badly chosen project can waste borrowed money. Public investment earns its fiscal case only when the asset adds enough economic value over time.
Current spending creates a different problem when a temporary response becomes a permanent claim on revenue. Subsidies introduced after a price shock may be difficult to withdraw once households or industries have adjusted to them. Transfers carry the same risk when their cost continues long after the circumstances that prompted them have changed.
Debt reduction through indiscriminate cuts would create another problem. India still has a large infrastructure deficit. Cutting viable public investment to achieve a lower debt ratio could also weaken the nominal growth on which debt reduction depends.
The Centre has brought the fiscal deficit down sharply since FY21. The revised GDP series does not alter that achievement. It has made the earlier debt targets difficult to interpret. The Finance Ministry should publish a revised medium-term debt path using the 2022-23 GDP series. Fiscal performance can then be judged against numbers calculated on the same basis.