India’s embrace of fiscal discipline in 2003 was a response to the memory of the early 1990s, when high deficits, falling reserves and humiliating external dependence forced policymakers to confront the limits of fiscally reckless governance. The Fiscal Responsibility and Budget Management (FRBM) Act attempted to place India’s finances in a legal corset, setting clear targets for deficit reduction and debt sustainability. The ambition was striking: a fiscal deficit capped at 3% of GDP, Union government debt limited to 40%, and a combined general government ceiling of 60%.
Two decades later, the gap between intention and outcome has only widened. And the reasons lie as much in the political economy of public finance as in the rigidity of the law itself.
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A fiscal framework strained by slippages
The FRBM Act’s numerical targets have repeatedly been missed. Each deadline was postponed as circumstances changed—from the global financial crisis to domestic slowdowns. The pandemic blew the framework apart; the fiscal deficit jumped to 9.2% of GDP in 2020–21, far beyond anything the Act envisaged. The government eventually abandoned fixed targets in favour of a gradual “glide path” toward below 4.5% by 2025–26, acknowledging the impracticality of reinstating the 3% rule.
This experience reveals a deeper issue. A target that shifts with every shock ceases to guide behaviour. India’s fiscal rules were never strong enough in normal years, nor flexible enough in exceptional ones.
Debt ratios stubbornly high
The debt numbers illustrate the challenge. Central government debt has come down from 61.4% of GDP during the pandemic to 57% in 2023–24, according to the CAG and the Union Budget. State debt, however, adds roughly 23% of GDP, pushing total public debt close to 80%—far above the FRBM ceiling. The pressure shows most clearly in interest payments, which now consume 35% of the Centre’s revenue receipts. This structural burden leaves little room for the investments India needs in health, education, infrastructure and climate resilience.
India’s public debate tends to treat the deficit as a single number, ignoring the distinction between good and bad borrowing. This is a blind spot. Borrowing to build highways, ports, power grids or metro links creates future capacity and raises productivity. Borrowing to fund ever-rising subsidies, pension reversions, loan waivers or the losses of power distribution companies does not.
Without a distinction between capital and revenue borrowing—what many countries call a “golden rule”—consolidation inevitably targets the easiest items to cut: investment and asset creation. The FRBM Act does not address this fundamental imbalance, and the results are visible in India’s persistent under-investment in public goods.
Cyclical vs structural deficits
A second gap is India’s unwillingness to distinguish between cyclical and structural deficits. Most modern fiscal frameworks aim to stabilise the economy by allowing higher deficits during downturns and enforcing consolidation when growth strengthens. India does the opposite; deficits rise when the economy weakens and remain high when it recovers.
A structural deficit target, adjusted for the economic cycle, would prevent this pro-cyclical tendency. It would give governments the flexibility to support the economy during recessions while ensuring discipline in periods of buoyancy. The FRBM’s fixed targets offer neither nuance nor stability.
Revenue weakness: The quiet structural constraint
India’s fiscal problem is not only on the expenditure side. The tax-to-GDP ratio, at 11–12%, remains well below that of comparable economies. GST, though transformative in scale, continues to grapple with rate complexity, compliance burdens and weak buoyancy. Corporate tax concessions and incentives have further eroded the base.
A credible fiscal framework must address this revenue fragility. Without a strong and predictable revenue stream, India will remain dependent on borrowing to sustain even routine spending. That inevitably pushes debt higher, regardless of the deficit target chosen.
The political economy of weak enforcement
The most decisive factor behind FRBM’s limited influence is political. Election cycles encourage loan waivers, cash transfers, free power, expanded subsidies, and costly reversions to the old pension scheme. States face almost no meaningful penalties for fiscal indiscipline, even though they account for nearly 60% of public spending. Off-budget borrowings and guarantees allow both levels of government to present a more flattering picture of their finances than reality permits.
Fiscal rules work only when governments value credibility. In India, rules have often been amended to accommodate political priorities rather than shaping them.
Unlike Germany’s constitutional debt brake, which requires a supermajority to suspend, India’s framework depends on routine parliamentary approval. The contrast in credibility is stark. While the creation of the Public Debt Management Cell (PDMC) has improved data consolidation, the institution remains within the Ministry of Finance and lacks operational independence.
An independent fiscal council, empowered to critique assumptions, monitor compliance and expose creative accounting, would significantly strengthen credibility. Without such an institution, fiscal numbers are only as reliable as the political will behind them.
States: The missing half of fiscal consolidation
Any meaningful consolidation requires addressing state finances. Several states have expanded borrowing through subsidies, guarantees and the balance sheets of state-owned enterprises—especially power distribution companies. These contingent liabilities eventually migrate to the general government’s books.
A more coherent fiscal compact is overdue. States need uniform reporting standards, transparent disclosure of all guarantees, and incentives that reward fiscal responsibility. The Sixteenth Finance Commission is well placed to embed these reforms in India’s fiscal architecture.
India’s fiscal framework needs more than new targets; it needs a broader re-imagination. A sound fiscal rule must distinguish productive from unproductive borrowing, target structural rather than headline deficits, strengthen tax capacity, and recognise the political incentives that fuel fiscal drift. It must be backed by strong institutions, independent oversight, and a federal framework that brings states into the discipline regime without undermining their autonomy.
Fiscal credibility is not a technocratic exercise. It reflects the maturity of governance and the resilience of institutions. If India wants to enter 2047 with the confidence of a developed economy, it must overhaul its fiscal architecture now—before the next shock exposes the weaknesses that have accumulated over two decades.
Susmita Kalyani is a doctoral scholar in economics and Dr Aneesh KA Assistant Professor at CHRIST University, Delhi NCR Campus.