Fiscal fortitude: India’s debt-to-GDP record dwarfs shaky G7

The debt-to-GDP ratio is a widely accepted indicator of a country's fiscal health.

Finance minister Nirmala Sitharaman in the Union Budget has outlined a plan to reduce the central government's debt-to-GDP ratio to 50 per cent by 2031, marking a significant shift from a qualitative goal to a specific, measurable target.

This signals a significant pivot in India’s public finance approach and philosophy, delineating a new architecture erected on a declared debt-to-GDP target as the principal fiscal anchor, adopting a more transparent and accountable approach to fiscal management.

The debt-to-GDP ratio is a widely accepted indicator of a country's fiscal health, and India's decision to set a target for reducing this ratio demonstrates its commitment to prudent fiscal management with specific medium-term targets.

On a like-to-like scale, India's central government debt-to-GDP ratio presents a healthy picture. Compared to its G7 counterparts, India's debt-to-GDP ratio is remarkably low. Except for Canada and Germany, the other five G7 countries have recorded ratios above 100 per cent or near that level over the last decade.

Since 2013, India's average central government debt-to-GDP ratio has been 49.03 per cent, significantly lower than the USA (97 per cent), UK (91 per cent), Japan (197 per cent), Italy (132 per cent), and France (84 per cent). Only Canada (46 per cent) and Germany (44 per cent) have reported lower central government debt-to-GDP ratios than India during this period.

The USA’s central government debt-to-GDP ratio has remained above 100 per cent since 2020, as also Japan’s, Italy’s and UK’s (barring 2022, when it was marginally lower at 99.8 per cent), according to International Monetary Fund (IMF) data.

India’s central government debt-to-GDP ratio was 56.1 per cent in 2023-24 and estimated at 57.1 per cent in 2024-25.

Prudent, contemporary and transparent

The debt-to-GDP ratio is a metric that sets a nation's public debt against its gross domestic product (GDP). This ratio offers a reliable gauge of a country's debt repayment capacity, juxtaposing liabilities with economic output.

“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. It is also recognized as a more reliable measure of fiscal performance as it captures the cumulative effects of past and current fiscal decisions. It is expected that the debt to GDP based fiscal consolidation strategy would help rebuild buffers and provide requisite space for growth-enhancing expenditures,” the finance minister said in the `Statements of Fiscal Policy’ as required under the Fiscal Responsibility and Budget Management Act, 2003, which was tabled in the Lok Sabha as part of the Union Budget documents.

In numerical terms, the debt-to-GDP ratio is expressed as a percentage, to illustrate the number of years it would require to repay debt if GDP is dedicated solely to debt servicing.

A prudent debt-to-GDP ratio is essential for maintaining investor confidence and ensuring economic resilience. A higher debt-to-GDP ratio escalates default risk, imperilling fiscal stability, and at the extreme, a potential default can trigger financial contagion, unsettling domestic and international markets.

“The choice of fiscal anchor aligns well in the context of sustained efforts of the Government to promote fiscal transparency,” the `Statements of Fiscal Policy’ said.

Scenario mapping

Assuming no major economic shocks, the government plans to keep its fiscal deficit in check over the next five years (FY 2026-27 to FY 2030-31). The goal? To steadily reduce the central government's debt burden, aiming for a debt-to-GDP ratio of around 50 per cent by March 31, 2031.

According to the finance ministry, in the best case scenario of fiscal consolidation, with an average annual nominal GDP growth rate of 11 per cent between 2026 and 2031, India should be able to clock a debt-to-GDP ratio of 47.5 per cent. It would be 52 per cent in the worst case scenario, at an average annual nominal GDP growth rate of 10 per cent.

Maintaining a consistently low debt-to-GDP ratio is necessary to create space for growth-enhancing expenditures, which is critical to achieve the growth ambitions in the broader economy.

Pivots in public finance management, unlike trailblazing startups, are not commonplace. This budget could well turn out to be one such sans any unforeseen exogenous or endogenous macroeconomic shocks.