What is driving Budget 2025's tight fiscal-deficit target and new financial anchor?

Trideep Bhattacharya, president and chief investment officer, equities, Edelweiss Asset Management Limited (EAML), believes that these moves are aimed at better rating and integration into the global markets. He said, "GOI  (government of India) has been focused on improving the rating since it can structurally lower the country risk premium and accordingly improve the cost of borrowing in global markets."

It had also become important to align the fiscal scale to a global standard—with the debt-to-GDP ratio—as an annexure to the Budget 2026 noted.

Global standard

Marzban Irani, chief investment officer of fixed income at LIC Mutual Fund, too believes that this has to do with aligning with the global practices. Irani said, "It (also) gives flexibility and a more realistic picture. Hence, the focus on moving to debt-to-GDP (as a financial anchor)."

Annexure 1 of the budget's Fiscal Responsibility & Budget Management (FRBM) Act document seems to suggest that as well. It reads, "The choice of debt to GDP ratio as the fiscal anchor is in line with current global thinking. It encourages shift from rigid annual fiscal targets towards more transparent and operationally flexible fiscal standards."

Edelweiss' Bhattacharya said that global rating agencies had flagged India's higher debt/GDP against those of comparable emerging economies as a case against a ratings upgrade. "Hence, the incremental focus on moving away from explicit deficit target to the debt/GDP metric," he said.

"At 83% of GDP, India’s debt/GDP is low compared to large economies globally. The government is targeting to bring this down to 78% by 2029," he added.

Rajeev Radhakrishnan, chief investment officer, fixed income, SBI Mutual Fund, told Moneycontrol that while the new target affords more flexibility to the government, it cannot be completely unanchored from the fiscal deficit number.

"Both are related. Unless you have the fiscal deficit under control, you can't achieve a reduction in debt to GDP," he said.

He does not believe that the recent actions are targeted at getting a better rating, though that could come as a consequence in the long term. According to him, the government had been on the fiscal-consolidation path for a few years now, since the pandemic (when the fiscal deficit had reached 9.2 percent of GDP in FY21). With a new anchor in the debt-to-GDP ratio, he thinks, the government is aiming for greater leeway.

More flexibility

That is, instead of just having one lever—of the fiscal deficit target—the government could have two levers of debt and GDP growth to achieve the target ratio.

Radhakrishnan said that while the target ratio has been set for the medium term at 50 percent with wiggle room of 1 percent by 2031, the budget is silent on the path that will be taken to achieve this. He added, "To that extent, the expectations could be that the FD (fiscal deficit) stabilises at some lower level and GDP growth sustains at a higher level over the period."

The new measure will also improve the government's spending capacity from FY27, according to Kotak Institutional Equities' post-budget analysis. The report said, "The government has targeted the center’s debt/GDP at 50% (+/-1%) by FY2031 (similar to FY2020 levels) from 56.1% in FY2026BE. The debt/GDP targets imply an annual fiscal consolidation of 10-20 bps (basis points) over FY2027-31, thereby reducing the need for any aggressive consolidation hereon. As such, we expect a gradual improvement in the spending ability of the central government from FY2027."