Beyond FY31: Centre may need 1-2 years more to meet 50% debt-to-GDP target

As per the latest business developments, The Centre could take another one or two years to bring its debt-to-GDP ratio down to around 50 percent, potentially extending the timeline beyond the FY31 target due to elevated spending pressure, two government sources stated.

This potential delay comes as the government faces elevated expenditure pressures from subsidies and relief measures aimed at micro, small and medium enterprises (MSMEs), which could slow fiscal consolidation efforts.

“The Centre is managing its expenditure. Even though external uncertainties have put some strain on the Centre's finances, the aim to stick to the fiscal consolidation path continues,” one of the source cited above stated.

“This year the fiscal deficit may come in at 4.5-4.6 percent of the GDP. Elevated expenditure is likely to be on subsidy and some schemes announced to provide relief to certain sectors, mainly MSMEs.”

The finance ministry had not responded to an email seeking comment by the time of publication.

For FY27, the government has budgeted for a fiscal deficit of Rs 16.96 lakh crore, or 4.3 percent of the GDP, compared with the revised estimate of 4.4 percent for FY26.

During April-July FY27, deficit stood at Rs 4.55 lakh crore, or 26.8 percent of the full year’s target. In the year-ago period, it was at Rs 4.68 lakh crore, or 29.9 percent.

The finance ministry will begin its Budget preparation for FY28 from October, when it will take a closer look at the deficit numbers.

If the timeline of debt reduction is pushed back by a year or two, the target could effectively move to FY32 or FY33. The government, that stated, has not announced any change to the debt reduction timeline.

The second government source stated the debt-to-GDP ratio timeline “may get delayed by two years” but did not elaborate.

Debt reduction stays the fiscal anchor

The Centre made the debt-to-GDP ratio the anchor of its fiscal consolidation framework in the Budget for FY26.

The framework allows the government some flexibility on the deficit path while maintaining a declining trajectory for the debt-to-GDP ratio. The medium-term target aims to bring the government’s debt to 50 percent of the GDP, within a range of 49-51 percent, by March 31, 2031.

The Centre’s debt-to-GDP ratio is pegged at 55.6 percent in the Budget Estimate for 2026–27, down from 56.1 percent in the revised estimate for 2025–26.

Total expenditure in April-July stood at Rs 17.62 lakh crore, or 32.9 percent of the budget estimate for the full year, compared with 30.9 percent in the year-ago period.

Spending on major subsidies, including fertiliser, food and petroleum, stood at Rs 1.54 lakh crore during the period against Rs 1.14 lakh crore last year.

Urea subsidy alone stood at Rs 66,058.60 crore compared with Rs 41,927.11 crore a year earlier. The spending is already around 57 percent of the budget estimate for the full year.

At the same time, the fiscal deficit during April-July stood at Rs 4.55 lakh crore, or 26.8 percent of the full-year budget estimate, compared with Rs 4.68 lakh crore, or 29.9 percent, last year, supported by stronger tax collections.

The government’s expectation of a 4.5-4.6 percent deficit for FY27 would as a result be above the budget target of 4.3 percent.

The government has consistently met or outperformed its fiscal deficit targets in recent years, staying firmly on the post-pandemic fiscal consolidation path.

The fiscal deficit has reduced dramatically from 9.2 percent in FY21 (pandemic year) to 4.4 percent in FY26.