Centre likely to cut debt-to-GDP ratio to around 55% in FY27: Report

For FY26, the Centre has pegged the fiscal deficit at 4.4 per cent of GDP, lower than the revised estimate of 4.8 per cent for FY25.

• Centre aims to lower debt-to-GDP ratio to 54.5-55% in FY27 from 56.1% in FY26
• Debt-to-GDP ratio replaces fiscal deficit as main fiscal anchor
• Final FY27 strategy depends on GDP growth outlook after January estimates

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The Centre is considering a target of lowering the debt-to-GDP ratio to around 54.5-55 per cent in FY27, compared with the 56.1 per cent estimated for FY26, Business Standard has learnt from a government official. The move would signal a continued, but calibrated, approach to fiscal consolidation in the coming financial year.

A final decision on the FY27 consolidation strategy will hinge on the economic growth outlook, which will be reassessed after the release of the first advance estimates of GDP for FY26 on January 7, the official told Business Standard on condition of anonymity. The government is expected to adopt a moderate consolidation path rather than an aggressive tightening, the official added.

In the FY26 Union Budget, Finance Minister Nirmala Sitharaman repositioned the debt-to-GDP ratio as the government's main fiscal anchor, replacing the long-standing practice of treating the fiscal deficit as the primary operational target. Under the revised glide path outlined in Budget documents reviewed by Business Standard, the Centre aims to bring its debt burden down to 50 per cent of GDP by FY31, allowing for a deviation of one percentage point on either side.

The Medium-Term Fiscal Policy-cum-Fiscal Policy Strategy Statement tabled alongside the FY26 Budget mapped the Centre's debt trajectory for FY27 to FY31 under three nominal GDP growth assumptions - 10 per cent, 10.5 per cent and 11 per cent. For each growth scenario, the statement outlined mild, moderate and high consolidation paths, offering flexibility depending on the extent of fiscal tightening chosen by the government, Business Standard reported.

The strategy, the statement said, is intended to provide operational room to respond to unexpected developments while ensuring that central government debt remains on a transparent and sustainable path. While annual fiscal deficit targets will continue to be announced in future Budgets, these numbers will now be derived from the debt objective rather than acting as the primary fiscal goal.

Presenting the FY26 Budget, Sitharaman underlined that the government's focus would be on keeping yearly fiscal deficits aligned with a declining debt trajectory. For FY26, the Centre has pegged the fiscal deficit at 4.4 per cent of GDP, lower than the revised estimate of 4.8 per cent for FY25. Earlier this month, she informed Parliament that the debt-to-GDP ratio for FY26 would stand at 56.1 per cent, while flagging concerns over rising debt-to-GSDP ratios at the state level, Business Standard noted.

The International Monetary Fund, in its latest Article IV consultation on India, has advised the government to reassess its medium-term debt target and make it more ambitious by factoring in state government liabilities. Faster fiscal consolidation, the Fund said, would help bring down debt-servicing costs sooner and rebuild buffers against future economic shocks, Business Standard reported.

Meanwhile, CareEdge Ratings has projected a slightly slower pace of consolidation, estimating the fiscal deficit for FY27 at 4.2-4.3 per cent of GDP. Even so, the ratings agency believes the Centre could reduce its debt ratio to around 50 per cent, with a one-percentage-point margin, by FY31 if nominal GDP growth averages about 10.7 per cent over the next five years. Laying out a clear debt trajectory, the agency said, would allow the government to adjust annual fiscal deficits in line with evolving growth conditions, as cited by Business Standard.