India is set to alter its fiscal policy approach, shifting its focus from specific fiscal deficit targets to the government debt-to-GDP ratio after the fiscal year 2025-26.

What Happened: The Indian government plans to move away from the fiscal deficit targeting framework, T.V. Somanathan, the finance secretary at the Ministry of Finance, told Reuters in an interview. The debt-to-GDP ratio will become the anchor for fiscal policy post 2026.

“We were moving away from this fiscal deficit targeting sort of framework, where after 2026 we will look at debt-to-GDP ratio as an anchor,” Somanathan said.

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Traditionally, India has aimed to maintain a fiscal deficit of 3% of GDP, a target that has proven challenging to achieve. The COVID-19 pandemic further strained India’s debt burden and budget deficit, which have since been managed.

The central government is working towards reducing its fiscal deficit to 4.9% of GDP by March 2025 and below 4.5% by March 2026. Somanathan expressed confidence that India can sustain a fiscal deficit above 3% due to its high nominal growth rates.

Rating agencies have frequently highlighted India’s high debt-to-GDP ratio as a significant factor influencing its sovereign rating. Fitch Ratings anticipates India’s debt to hover around 80% of GDP until 2027-28. “The government is committed to reducing the debt as a percentage of GDP,” Somanathan confirmed.

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