Centre To Set Fiscal Deficit Target Between 3.7-4.3% Post 2025-26: Report

The fiscal deficit, which represents the difference between a government's income and expenditure as a percentage of GDP, is expected to be kept below 4.5 per cent for the fiscal year 2025-26

The government is considering adopting a fiscal deficit target range of 3.7-4.3 per cent starting after 2025-26, moving away from the traditional single-target approach. This shift is intended to help lower national debt and promote economic growth, according to a Mint report citing two anonymous sources.

The fiscal deficit, which represents the difference between a government's income and expenditure as a percentage of GDP, is expected to be kept below 4.5 per cent for the fiscal year 2025-26. Following that period, the government plans to implement a range-based target to provide flexibility while working to reduce national debt.

"This approach does not imply an immediate reduction to a 3 per cent deficit, but it allows for adaptability," the source explained in the report. The fiscal deficit target, as set by Finance Minister Nirmala Sitharaman for the 2021-22 period, aims for 4.5 per cent by 2025-26. The COVID-19 pandemic caused the deficit to soar to 9.1 per cent in that fiscal year, well above the initial 3.5 per cent target, due to increased government spending necessary to stabilise the economy.

According to the second source, a range-bound approach has been previously considered, given India's improving debt-to-GDP ratio and rising 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.

The proposed fiscal deficit range of 3.7-4.3 per cent for the period after FY26 is higher than the 2.5 per cent target suggested by the N.K. Singh committee for FY23, which permitted a 0.5 per cent deviation under exceptional circumstances. Additionally, this new target surpasses the levels mandated by the FRBM Act by 1.2-1.8 percentage points.

A source in the report said that the government is committed to reducing its debt-to-GDP ratio by 0.5-1 per cent annually, with a goal of rapidly lowering it to 50 per cent of GDP. “While we are on a declining fiscal deficit path, excessive compression may hinder growth, necessitating a careful trade-off,” the source noted.