India Sets Debt-to-GDP Target at 55.6% for FY27
The Indian government has set an ambitious target to reduce its debt-to-GDP ratio to 55.6% by the financial year 2026-27. This decision, announced by Finance Minister Nirmala Sitharaman, comes alongside a projected nominal GDP growth of 10%, aiming to boost the economy while ensuring fiscal responsibility. The reduction in the debt ratio is expected to free up resources for priority sectors by lowering the government’s interest payments.
This new focus on the debt-to-GDP ratio signifies a shift from over two decades of concentrating on fiscal deficit reduction. The medium-term goal is to bring the ratio down to 50% by 2030-31, within a band of 49-51%. This strategy is particularly crucial as global rating agencies, such as S&P, Moody’s, and Fitch, often cite India’s high public debt as a barrier to achieving better ratings, which could lower borrowing costs for the government.
Next year, the government’s total borrowing is projected to rise sharply to Rs 17.2 lakh crore from Rs 14.61 lakh crore, primarily to finance an estimated fiscal deficit of Rs 16.96 lakh crore, which is around 4.3% of GDP. Sitharaman confirmed that the government successfully met its fiscal deficit target of 4.4% for the previous financial year, indicating a commitment to fiscal discipline.
The need for increased borrowing stems from significant past debts that require repayment. According to the Reserve Bank of India, the Centre must pay back Rs 5.47 lakh crore of borrowed funds next year. After accounting for these repayments, the net borrowing requirement will be Rs 11.73 lakh crore. This trend of rising debt repayments is expected to continue, reaching Rs 9.06 lakh crore by 2030-31.
Experts warn that high interest payments on existing debt can hinder government spending on essential development projects. For instance, in FY27, interest payments are anticipated to soar from Rs 12.74 lakh crore to Rs 14.04 lakh crore, consuming about 26% of the total projected expenditure of Rs 53.47 lakh crore. In contrast, the capital expenditure target is set at Rs 12.22 lakh crore, illustrating a concerning imbalance.
The Economic Survey highlighted the debt-to-GDP target as a serious commitment, offering the government some flexibility to adjust fiscal policies in response to changing global economic conditions. However, due to ongoing geopolitical uncertainties, the Budget documents advise against setting rolling targets for the next two years, citing the unpredictable nature of global economic dynamics affecting India’s growth outlook.
