Budget 2026: What Is Debt-To-GDP Ratio And Why It Matters More Than Ever This Year

Finance Minister Nirmala Sitharaman will present the Union Budget 2026 in Parliament on Feb. 1. According to various reports, the government is expected to place more emphasis on the debt‑to‑GDP ratio instead of just focusing on the headline fiscal deficit.

The debt-to-GDP ratio shows total government borrowing compared to the Gross Domestic Product. The crucial metric provides an estimate of the government's debt compared to the size of the economy. All government liabilities are included in the debt component. Similarly, GDP represents the total value of products and services generated in the nation in a given year. A higher ratio denotes financial stress, while a lower ratio reflects a healthier balance between debt and the economy's potential to create income.

India's debt-to-GDP ratio stood at 56% in FY 2025-26. The total government debt is estimated to reach around Rs 196.79 lakh crore by the end of the current financial year.

As per reports, the government's objective is to reduce the debt-to-GDP ratio to around 50% by 2031.

How Debt-To-GDP Ratio Measures Government's True Fiscal Health

Compared to a single-year deficit, the debt-to-GDP ratio provides a more detailed assessment of fiscal health. The government's fiscal freedom could be limited due to the increasing debt burden. A higher debt-to-GDP ratio would make it more challenging for the government to invest in growth initiatives or react to economic shocks. Rising debt levels can also raise borrowing costs, as investors want higher rates to offset perceived risks.

Future budget flexibility may be jeopardised when debt servicing takes precedence, leaving less money for development spending. So, controlling the debt-to-GDP ratio well is crucial for both investor confidence and economic stability.

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Why Debt-To-GDP Ratio Has Become Central To Budget 2026

For many years, India has used the fiscal deficit, which is the difference between government spending and revenue, as the main indicator of fiscal discipline. For a developing economy, a deficit of between 3% and 4% of GDP is regarded as manageable since it allows for expansion while ensuring macroeconomic stability. The fiscal deficit target for 2025-2026 was set below 4.5% of GDP under the revised Fiscal Responsibility and Budget Management (FRBM) Act. Now that this goal is almost accomplished, the government has implemented a new glide path that centres on fiscal management around the debt-to-GDP ratio.

The roadmap for the next six years was reportedly outlined in the FRBM statement released on Feb. 1, 2025. In her Budget speech in July 2024, Sitharaman said, “The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5% next year.”

She added, “From 2026‑27 onwards, our endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP.”

How Debt-To-GDP Ratio Shapes India's Room For Spending, Taxation And Investor Confidence

Investor confidence and taxation are directly influenced by the debt-to-GDP ratio. The key economic indicator helps investors evaluate the risk of lending to the government. Emerging economies often target lower ratios to maintain investor confidence. It also indirectly affects monetary policy by shaping investor sentiment and inflation expectations. Investors can use this ratio to assess country risk before buying government bonds or stocks, anticipate potential tax or policy changes, and gauge economic stability and growth prospects.

In terms of government expenditure, while higher debt might lead to a reduction in government expenditure, a lower debt-to-GDP ratio offers more room to finance various initiatives.

Why Debt-To-GDP Ratio In Focus Ahead Of Budget 2026

The debt-to-GDP ratio, which reflects borrowing patterns, economic growth momentum, and the government's ability to repay debt, shows the cumulative effect of fiscal policy in contrast to a single-year deficit. Adopting this metric is consistent with the government's attempts to increase transparency, particularly in reporting off-budget borrowings, according to the FRBM announcement on Feb. 1, 2025.

Additionally, a debt-focused strategy permits operational flexibility. Policymakers can modify fiscal policy in accordance with growth objectives while preserving long-term debt sustainability, as opposed to strictly sticking to an annual deficit target that might necessitate sudden spending cuts during slowdowns.

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