Ranging from FY27, India will pivot to the debt-to-GDP ratio as the anchor for fiscal consolidation, transferring away from the fiscal deficit to GDP metric.
As the Finance Minister readies to current the Funds for FY27 on Sunday, all eyes will likely be on the fiscal deficit quantity. On this context it might be value revisiting the contrasting fiscal trajectories which have emerged over the previous few years, whereby India has launched into a path of fiscal prudence while most main international economies have tilted in direction of profligacy.
India vs world
Usually, fiscal deficits (as a share of nominal GDP) of main developed economies are seen moderating from the peaks of 2020-21 following the large stimulus rolled out to cope with the Covid impression on financial system. Nevertheless, present deficit ranges stay wider than these recorded in the funds 12 months instantly previous the pandemic (see chart). Germany, as an illustration, has moved from a funds surplus right into a deficit.
India’s fiscal deficit, against this, has contracted from 4.6 per cent of GDP in FY20 to a budgeted 4.4 per cent for FY26. Importantly, sure off-budget expenditures have been rationalised and included in the fiscal deficit solely from FY22. On a like-to-like foundation, the fiscal deficit for FY20 would have been nearer to five per cent of GDP. Seen by means of this lens, India’s fiscal place has improved over the interval, not like that of most different main economies.
Deficit to debt
Ranging from FY27, India will pivot to the debt-to-GDP ratio as the anchor for fiscal consolidation, transferring away from the fiscal deficit to GDP metric. The Union authorities’s budgeted debt-to-GDP ratio for FY26 stands at round 55 per cent of GDP (GDP per first advance estimates) in contrast with 50 per cent in FY20. The federal government has set a medium-term goal of decreasing this ratio to round 50 per cent by FY31.
The chart exhibits debt-to-GDP ratios throughout nations, as compiled by the IMF, which accounts for the excellent debt of central, state and native governments. While the ratios of the US, China and the UK have expanded sharply — by 16, 37 and 18 share factors, respectively, — India’s debt ratio has risen a modest 6 share factors between 2019 and 2025.
The subsequent metric is curiosity expenditure as a share of whole outlay. Per FY26 Funds, this ratio for India has risen 2 share factors in contrast with FY20. Right here, too, India stands out amidst nations equivalent to the US and the UK, which have seen a fabric enhance in the vary of 4-6 share factors.
Bond yields
The advantages of fiscal consolidation are seen in steady sovereign yields. The chart depicts the point-to-point variation in yields on 10-year sovereign debt securities — from December 31, 2019, until date. Although India’s yields have elevated over the previous 5 months — from a 52-week low of 6.1 per cent 6.7 per cent — they continue to be broadly in line with end-2019 ranges. While these of the US and the UK have develop into over twice and 5 instances, these of Japan and Germany have swung from adverse to constructive territory — Japan from -0.01 per cent to 2.25 per cent and Germany from -0.19 per cent to 2.85 per cent.
Implications of India’s accountable fiscal governance are far-reaching, in the sense that Indian bonds have discovered place in a number of international bond market indices and a sovereign credit standing improve to BBB from BBB-/ BBB (low) by companies equivalent to S&P and Morningstar. With India’s debt market deepening, any significant decline in sovereign yields ought to play favourably in the arms of companies, as their value of capital will likely be immediately or not directly linked to the sovereign yield. At a time when the value of capital in main economies equivalent to the US, the UK, Japan, and Germany has elevated considerably relative to pre-Covid ranges, this improvement could also be considered a macroeconomic achievement for India.
Extra importantly, in the occasion of one other international financial shock akin to the Covid-19 disaster — nations which have maintained larger fiscal self-discipline will likely be higher positioned to deploy stimulus measures. Many superior economies, constrained by elevated debt ranges and considerably increased bond yields, could discover their coverage room way more restricted.
Revealed on January 31, 2026
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