Targeting the deficit limit would continue to remain the primary anchor of states’ fiscal management, instead of a cut in debt ratio, he said. “That goal for states remains, there is no change in that now,” the official told ET.
“Of course, it’s a given that without keeping the fiscal deficit in control, you can’t trim the debt ratio substantially.”
Presenting the full budget for 2024-25, Sitharaman last month said the Centre would remain on the fiscal consolidation path. From 2026-27, she said, “Our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP (gross domestic product).”
Later, finance secretary (now cabinet secretary-designate) TV Somanathan said the reduction in the debt ratio would become the primary anchor for the government’s fiscal management from 2026-27, instead of fiscal deficit. He indicated that the fiscal deficit would remain within a range in the years from 2026-27.
Senior finance ministry officials have since stressed that targeting a fiscal deficit of 3% of GDP by the Centre, as stipulated under the Fiscal Responsibility and Budget Management Act, 2003, is outdated.The requirement of the central government of a fast-growing nation like India differs from many others, and the country can easily sustain debt if it’s kept at a reasonable level, they have contended.
States’ deficit
Last year, Sitharaman had said that states would be allowed a fiscal deficit of 3.5% of gross state domestic product (GSDP), of which 0.5% would be tied to their power sector reforms. States collectively budgeted a fiscal deficit of 3.1% for FY24, against 2.8% (provisional) in the previous year, according to the Reserve Bank of India‘s December 2023 report on state finances. In the pandemic year (FY21), their combined deficit had hit 4.2% of GSDP.
But as many as 19 of the 28 states, including most north-eastern ones, had budgeted to breach the 3% fiscal deficit mark (the limit without the relaxation linked to power reforms) in 2023-24.
NR Bhanumurthy, director of the Madras School of Economics, said even when the Centre charts a path for the reduction in its debt ratio, “it should also firm up a credible road map for the instruments (fiscal deficit and revenue deficit cut) that will make it happen”.
“Otherwise, it can’t meet its goal on time,” he said.
The combined fiscal deficit of states in FY25 is expected to be 3.1% of GDP compared with 3.2% in FY24 (RE), said DK Pant, chief economist at India Ratings. Capital spending by states has to be promoted because it has a higher multiplier effect than that by the Centre. “Fiscal deficit limits for states should factor in their capex push, and some flexibility could be built into such limits on a case-by-case basis,” Pant said.
The Centre has promised Rs 1.5 lakh crore to states in the form of 50-year interest-free loans to boost their capex in FY25.
Debt reduction in focus
After a pandemic-induced spike to 89% of GDP in FY21, the combined debt of the Central and state governments has dropped to about 81%.
As for the Centre’s debt, it’s estimated to ease to a five-year low of 56.8% of GDP in the current fiscal from 58.2% a year before. The debt had spiked to 61.4% of GDP in FY21 from 52.3% in the previous year and has since remained elevated.