Context: The Union Government has announced a shift from fiscal deficit to debt-to-GDP ratio as the primary fiscal anchor from FY 2026-27, targeting a 50±1% ratio by 2031.
About Debt-to-GDP Ratio:
- It represents the proportion of a country’s total debt to its GDP, indicating economic stability and repayment capacity.
- Formula:
What it represents?
- A higher ratio signals increased risk of default and financial instability.
- A lower ratio indicates better fiscal health and investor confidence.
- Debt sustainability depends on growth rates, fiscal deficit trends, and interest payments.
Limitations of Debt-to-GDP Ratio
- Does Not Reflect Debt Composition: Ignores internal vs. external debt dynamics.
- Fails to Consider Fiscal Policy: Does not capture spending efficiency or investments.
- No Direct Correlation with Default Risk: Some high-debt countries remain solvent due to economic strength.
Need for India’s Shift to a New Fiscal Anchor
- Long-term Fiscal Stability: Debt-based targets ensure sustainable government borrowing.
- Greater Policy Flexibility: Reduces reliance on annual fiscal deficit limits.
- Transparency & Accountability: Addresses off-budget borrowings and improves public finance management.
- Global Alignment: Aligns India’s fiscal strategy with international best practices.
- Growth-Enhancing Expenditure: Ensures public spending focuses on productive sectors without excessive debt accumulation.
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