As we enter 2026, fiscal consolidation is no longer an option but a necessary imperative for India. Big challenges present themselves in the new year — an employment problem, growing debt, and growth sustainability, along with the need to stem inflation.
Indian policymakers cannot be content with the Second Quarter data of 2025 alone; a broader balancing act is required to secure long‑term stability.
Revenue growth and increasing debt levels have refined the trade-off between expansion and credibility. Policymakers should decide whether to sustain demand to protect jobs and growth, or tighten spending to reassure investors. The option they exercise will define India’s ability to balance ambition with discipline in its economic path.
Policy Signals
With the Union Budget on the horizon, fiscal consolidation has once again taken centerstage in policy discussions. The economy is in a strong position with robust nominal GDP growth in the second quarter, and healthy tax revenues.
The government must carefully balance rising expenditure pressures with the need for continued investment to support economic growth. This challenge requires pursuing fiscal consolidation while sustaining capital expenditure.
Fiscal deficit has seen a notable decline, dropping from 9.2 percent of GDP in FY21 to 5.6 percent in FY24 (revised estimate), signalling a gradual return to pre-pandemic levels. The Budget aimed for a further reduction to 4.4 percent in FY25, demonstrating a commitment to fiscal discipline.
This ratio is an important indicator of fiscal health, taking into account both central and state government debt. Compared to many developed nations, India’s ratio is lower, but it remains a key metric to monitor.
In India, monetary policy and fiscal discipline work together to promote stability through Flexible Inflation Targeting. Disciplined spending enables the Reserve Bank of India to cut rates, stimulating growth without triggering high inflation.
This coordination boosts investor confidence, controls inflation within a target range, and supports growth. Recent trends show strong capital expenditure and reduced long-term borrowing, indicating trust in sustained revenue growth and policy stability.
India’s general government debt-to-GDP ratio is currently around 80-82 percent, down slightly from its 2020 peak, but still elevated due to pandemic spending. Projections suggests a deline to 77–80 percent in the coming years.
In 2024, India’s Government Debt-to-GDP ratio was 81.92 percent, which is higher than the average of 70.14 percent from 1980 to 2024. The ratio reached its highest point in 2020 at 89.24 percent and its lowest point in 1980 at 47.94 percent.
The Central government aims to reduce its debt-to-GDP ratio to 56.1 percent by FY 2025-26 from 57.1 percent in FY 2024-25. It plans to continue fiscal consolidation from FY 2026-27 to FY 2030-31, targeting about 50±1 percent by March 2031.
The Revenue Deficit is also expected to decrease from 4.8 percent of GDP in FY 2024-25 to 4.4 percent in FY 2025-26.
Trade-Off
By committing to fiscal consolidation, governments signal to investors that they are committed to financial stability. This can result in lower borrowing costs, as investors are more inclined to lend money at favourable rates when they trust the government’s ability to repay.
Additionally, maintaining fiscal responsibility can curb inflation and currency depreciation. Excessive government borrowing can lead to higher inflation and a depreciating currency.
By controlling spending and debt, central banks can focus on maintaining price stability, preserving both investment value and currency strength. This reassures foreign investors and contributes to overall economic stability.
Strong fiscal management can have a positive impact on a country’s credit rating, making it more appealing to international investors. This can boost credibility and attract more investment opportunities.
Also, countries that practice fiscal prudence can create budgetary cushions — such as foreign exchange reserves — to protect against economic downturns. This reduces the risk of capital flight during crises and helps maintain stability in uncertain times.
Adhering to fiscal rules/consolidation and comitting to debt-to-GDP frameworks can bring various advantages. These include reduced borrowing costs, prevention of inflation and currency devaluation, improved credit ratings, and creating a safety net against economic downturns.
By demonstrating a commitment to responsible financial management, governments can instill confidence in investors and boost overall economic stability.
Next Wave of Economic Powerhouses
India’s economic growth is unique as it has bypassed the conventional industrialization phase and transitioned directly to a service-oriented economy. Its rapid growth is fuelled by a large domestic market and a robust technological and digital services sector, making it one of the fastest-growing major economies in the world.
When looking at other developing economies, like Brazil’s growth — it seems it is heavily dependent on its abundant natural resources and agricultural strength, making it a significant global supplier of commodities.
Despite having a higher per capita income and greater urbanization compared to India, Brazil grapples with economic volatility and inequality.
Indonesia, another developing economy, is harnessing its abundant natural resources — particularly extensive nickel reserves — to drive industrialization and growth. The country is poised to emerge as one of the top 10 global economies by 2040, fuelled by industrial development, consumer spending, and digital expansion.
India is known for its service and consumption‑driven model, Indonesia for resource‑backed industrialization, and Brazil for a mature resource‑and agriculture‑export model. Together, they represent the next wave of global economic powerhouses.
Then what makes India unique is its large consumer market and consistent record of robust growth.
Conclusion – Outlook for 2026
India’s economic forecast for 2026 shows robust growth driven by domestic demand, key reforms like GST, and increased investments. To sustain this growth, India must maintain fiscal discipline, embrace technological advancements, promote green energy, and navigate global uncertainties. Balancing credibility and flexibility is crucial to avoiding past crises.
Ongoing structural reforms are necessary for sustainable growth. Strategic decisions on expenditure, technology integration, and debt management will shape India’s transition from a rapidly growing economy to a sustainable long-term growth engine.
The key question is not whether India should pursue fiscal consolidation, but how to balance it with sustaining capital expenditure. The best approach involves gradual consolidation and cutting non-essential spending without sacrificing capital expenditure.
With strong growth and lower inflation, the macroeconomic conditions support consolidation.
The upcoming Budget will reveal whether India chooses steady consolidation or bold recalibration — decisions that will shape not only its domestic path but also global confidence in India’s economic future.
