4 min readNew DelhiFeb 1, 2026 02:35 PM IST
In the first year of the finance ministry’s pivot to the debt-to-GDP ratio as its primary fiscal target, Finance Minister Nirmala Sitharaman on Sunday said the government will aim to bring down the ratio to 55.6% in 2026-27 from 56.1% this year, with the country’s nominal GDP assumed to grow by 10% to Rs 393 lakh crore.
“A declining debt-to-GDP ratio will gradually free up resources for priority sector expenditure by reducing the outgo on interest payments,” Sitharaman said in Parliament while presenting the Union Budget for 2026-27.
The debt-to-GDP target for next year is higher than economists’ expectations of around 55%.
The move to debt-to-GDP comes after more than two decades of the Indian government targeting a reduction in the fiscal deficit. Mooted last year, the debt target has a medium-term goal of 50% by 2030-31 in a band of 49-51%. To be sure, global agencies, including ratings firms like S&P, Moody’s, and Fitch, focus on the general government debt as a percentage of GDP, which includes the debt of state governments.
Paying back debt
India’s high public debt levels have been repeatedly cited by these agencies as an obstacle to higher ratings, which can help lower the cost of the government’s borrowings – which is set to rise sharply to Rs 17.2 lakh crore next year from Rs 14.61 lakh crore in 2025-26 on a gross basis to finance the estimated fiscal deficit of Rs 16.96 lakh crore, or 4.3% of GDP. Sitharaman said on Sunday that the Centre had, as promised, achieved its fiscal deficit target of 4.4% of GDP for 2025-26.
This significant increase in the Centre’s borrowing – which is used to finance the fiscal deficit – has been necessitated by a big jump in past debt due to be repaid in 2026-27. As per latest data from the Reserve Bank of India, the Centre next year needs to pay back Rs 5.47 lakh crore worth of money borrowed in previous years. Netting for these repayments, the Centre’s borrowing is seen at Rs 11.73 lakh crore, slightly up from Rs 11.33 lakh crore this year. Going forward, the Centre’s debt repayments will rise even more and go up to Rs 9.06 lakh crore in 2030-31.
Experts point out that the high interest payments on debt already accumulated hamper the government’s ability to spend on productive areas. In 2026-27, for instance, the Centre’s interest payments will rise from Rs 12.74 lakh crore this year to Rs 14.04 lakh crore. To put this number into perspective, this accounts for 26% of the government’s entire projected expenditure of Rs 53.47 lakh crore for 2026-27. In contrast, the Centre’s capital expenditure target for next year, at Rs 12.22 lakh crore, is lower than just its interest payments.
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The Economic Survey for 2025-26, presented on Thursday, had said the debt-to-GDP target is a “concrete commitment with a specific date” which also affords the government “flexibility to fine-tune fiscal policy in response to emerging needs in the intervening period” at a time when the geopolitical and geoeconomic environment is volatile and unpredictable.
The Budget documents cited the same geopolitical and geoeconomic uncertainty as reasons for not providing the so-called ‘rolling targets’ for the debt-to-GDP ratio for the next two years.
“…uncertainty associated with significant changes in global macroeconomic and geopolitical environment continue to be concerns in fiscal policy management. While India’s growth outlook remains positive….it is not insulated from the risks emanating from outside the country. In this context, rolling targets for next two years have not been provided,” the Budget documents said.
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