The country’s public debt once posed a serious concern after the extraordinary borrowing forced by the Covid shock. At its peak, general government debt climbed close to 90% of GDP as revenues collapsed and emergency spending surged. Against this backdrop, finance minister Nirmala Sitharaman’s statement in Parliament that India is on track to bring the debt-to-GDP ratio down to 56.1% by 2025-26 marks a clear shift in the fiscal narrative. The question, however, is not whether consolidation is welcome, but whether it is durable—and whether the risks beneath the headline numbers are being adequately confronted.
India entered the pandemic with elevated public debt compared to many emerging-market peers. What has helped since is not retrenchment, but growth. A rebound in nominal GDP—driven by both real expansion and higher prices—has mechanically lowered the debt ratio. That arithmetic explains the improvement. It does not – by itself – guarantee resilience.
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Why the fiscal arithmetic holds—for now
At the level of the Union government, the numbers broadly add up. Under the amended Fiscal Responsibility and Budget Management (FRBM) framework, the Centre has committed to reducing the fiscal deficit to 4.5% of GDP by FY26, from 6.4% in FY23. Debt reduction follows directly from this glide path.
Two conditions have worked in the Centre’s favour. Nominal GDP growth has remained comfortably above the average interest rate on government borrowing, a basic requirement for debt sustainability. At the same time, tax revenues have outperformed expectations. GST collections and direct taxes have repeatedly exceeded budget estimates, allowing consolidation without sharp cuts to expenditure. Capital spending, in particular, has been protected.
This combination of growth, revenue buoyancy, and expenditure prioritisation lends credibility to the Centre’s near-term debt path. But it also rests on assumptions that may not hold indefinitely.
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What happens after FY26 remains unanswered
The consolidation story quietly stops at FY26. Beyond that year, India lacks a clearly articulated public debt anchor. The FRBM framework sets deficit targets but defers a binding medium-term debt ceiling to a future review. This is not a technical omission; it is an institutional gap.
Markets and rating agencies are less concerned with whether a government hits a single milestone than with whether fiscal discipline is embedded over time. Countries that have sustained consolidation typically tie deficits to an explicit debt anchor. India has not yet done so. Without clarity on what follows FY26, the current glide path risks being seen as episodic rather than structural.
Debt reduction that ends at a date risks becoming a political achievement rather than a fiscal rule.
State finances remain the weakest link
Even as the Centre consolidates, state finances tell a less reassuring story. Many states expanded borrowing sharply during the pandemic and have struggled to rein in revenue expenditure since then. Power sector losses, open-ended subsidies, and election-driven spending continue to strain budgets.
According to Reserve Bank of India data, the aggregate debt-to-GSDP ratio of states has edged up even as the Centre’s ratio declines. Unlike the Union government, states face tighter borrowing limits and have no monetary flexibility. This divergence matters. India’s fiscal credibility rests on the general government balance sheet, not just on New Delhi’s accounts.
Without stronger incentives and enforcement mechanisms for state-level discipline, Centre-led consolidation will remain incomplete.
External strength provides insurance, not immunity
One reason India’s public debt trajectory remains manageable is its strong external position. Foreign exchange reserves now cover more than 11 months of imports, compared to about seven months during the 2013 taper-tantrum episode, according to the RBI. External public debt remains low as a share of GDP and is largely long-term.
This sharply differentiates India from recent sovereign crises. Greece’s troubles stemmed from euro-denominated liabilities that behaved like foreign-currency debt. Pakistan and Sri Lanka ran into crisis because a large share of their public borrowing was external and short-term. India’s public debt, by contrast, is overwhelmingly domestic and rupee-denominated, giving policymakers greater room to manage shocks.
This buffer reduces the risk of sudden crisis. It does not remove the cost of carrying debt.
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Interest payments are the real constraint
Even domestic debt imposes limits. Interest payments already absorb over a quarter of the Centre’s revenue receipts, a concern repeatedly flagged by successive Finance Commissions. Even if debt ratios fall, the absolute stock of debt continues to rise, and so does the interest bill.
This constrains fiscal choice. Every rupee devoted to servicing past borrowing reduces space for health, education, and social protection. For a country with large developmental gaps, this trade-off is no longer abstract. Improving the quality of expenditure and raising durable revenues matter as much as lowering the deficit.
Consolidation that relies only on growth and inflation, without tackling spending efficiency, will eventually run into political resistance.
What lies outside the budget still matters
Headline public debt figures also obscure liabilities that do not always sit neatly on the budget. Off-budget borrowings by public sector entities, explicit guarantees to loss-making utilities, and the recurring need for bank recapitalisation have repeatedly added to India’s fiscal burden in the past.
These contingent liabilities do not vanish simply because reported public debt ratios improve. India’s experience with food subsidy financing and power sector bailouts shows how quickly fiscal comfort can erode when balance-sheet risks materialise. Debt sustainability depends as much on what lies outside the budget as on what is recorded within it.
Ignoring this dimension risks overstating fiscal strength.
Growth quality will decide sustainability
Finally, the character of growth driving debt reduction deserves scrutiny. A significant part of recent nominal expansion reflects higher prices rather than broad-based productivity gains. Capital-intensive growth has delivered weaker employment and uneven tax elasticity.
If inflation moderates—as monetary policy intends—or if growth slows due to external or domestic stress, the debt arithmetic can turn quickly. Growth-led consolidation is credible only if it rests on expanding private investment, employment, and incomes, not merely on a favourable deflator.
This is where fiscal consolidation intersects with development strategy.
A target within reach, but not on autopilot
India can reach a 56.1% public debt-to-GDP ratio by FY26 if current conditions broadly persist. Strong nominal growth, steady tax buoyancy, and adherence to deficit targets make the goal attainable. What will determine credibility beyond that point is whether discipline extends to state finances, contingent liabilities are brought under control, and a clear post-FY26 debt anchor is established.
Debt reduction is not an end in itself. It is a means to preserve policy space for growth, investment, and social spending. The real test of India’s fiscal strategy will lie not in meeting a near-term target, but in sustaining discipline once the milestone has been crossed.