Central government debt reduction plan expected to bring in more transparency

The proposal to move to a reduction in the debt-to-GDP ratio post-2025-26 as part of a new fiscal consolidation roadmap is expected to bring in more transparency in government finances, said a senior government source.
 
“Off-budget borrowings are not reflected in the fiscal deficit but show up in the central government debt. So targeting a reduction in the debt is a better and more transparent manner for fiscal consolidation,” said the source.
 
Further, targetting fiscal deficit as a percentage of the GDP also means fiscal consolidation is linked to the GDP performance, the source pointed out, adding that the effort would be to delink the two. 
 
In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman had announced that from 2026-27 onwards, the government’s endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as percentage of GDP.
 
Sources indicated that the fiscal deficit target may be kept as a range beyond 2025-26 but a decision on it will be taken later.
 
For FY25, the Union Budget has pegged the fiscal deficit at 4.9% of the GDP. The finance minister has said it would be lowered to less than 4.5% in 2025-26.
 
Sources also indicated that a decision on amending the Fiscal Responsibility and Budget Management (FRBM) Act that currently fixes the responsibility on the Centre to maintain and achieve fiscal deficit goals will also be taken later.
 
The FRBM Act has targeted fiscal deficit at 3% of the GDP but officials have often pointed out that apart from one year, this target was never met.