The government is considering setting a fiscal deficit target range of 3.7-4.3 percent after 2025-26, moving away from the traditional single-number target, as it aims to reduce the national debt and foster economic growth. This information was disclosed by two sources familiar with the matter to business daily Mint, under the condition of anonymity.

Fiscal deficit, the gap between a government's income and expenditure, is measured as a percentage of GDP. For 2025-26, the government plans to maintain the fiscal deficit below 4.5 percent, the first source told Mint.  Subsequently, a range-bound approach will be adopted to ensure flexibility while reducing the country's indebtedness.

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“This approach does not imply an immediate reduction to a 3 percent deficit, but it allows for adaptability,” the source explained. The fiscal deficit target, as outlined by Finance Minister Nirmala Sitharaman in 2021-22, aims for 4.5 percent by 2025-26. The COVID-19 pandemic had pushed the deficit to 9.1 percent in that fiscal year, far exceeding the original 3.5 percent target due to increased government spending to stabilize the economy.

According to the second source, this range-bound approach has been considered in the past, highlighting India’s decreasing debt-to-GDP ratio and accelerating GDP growth. “Instead of committing to a specific debt-to-GDP reduction each year, the Centre can adopt a more flexible strategy, provided it adheres to the fiscal path,” the source added.

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The proposed fiscal deficit range of 3.7-4.3 percent post-FY26 is higher than the 2.5 percent target recommended by the N.K. Singh committee for FY23, which allowed a 0.5 percent deviation in exceptional circumstances. This new target also exceeds the FRBM Act’s stipulated levels by 1.2-1.8 percentage points.

A spokesperson for the finance ministry did not respond to Mint's emailed queries. Moneycontrol could not independently verify the report.

Focus on Debt Reduction

A source told Mint that the government's commitment to reducing its debt-to-GDP ratio by 0.5-1 percent annually, aiming for a rapid decrease to 50 percent of GDP. “While we are on a declining fiscal deficit path, excessive compression may hinder growth, necessitating a careful trade-off,” the source noted.

Minister of State for Finance Pankaj Chaudhary recently informed the Lok Sabha that the Central government’s debt, including external borrowing and other liabilities, is expected to rise to Rs 185 trillion, or 56.8 percent of GDP, in 2024-25. The International Monetary Fund’s April 2024 World Economic Outlook reported that India's GDP at current prices reached $3.57 trillion in 2023-24.