Clipped from: https://www.thehindubusinessline.com/portfolio/india-holds-the-line-while-others-slip-in-fiscal-prudence/article70575170.ece
Lower deficits and stable yields leave India better positioned compared to major economies
Starting from FY27, India will pivot to the debt-to-GDP ratio as the anchor for fiscal consolidation, moving away from the fiscal deficit to GDP metric.
As the Finance Minister readies to present the Budget for FY27 on Sunday, all eyes will be on the fiscal deficit number. In this context it would be worth revisiting the contrasting fiscal trajectories that have emerged over the past few years, wherein India has embarked on a path of fiscal prudence while most major global economies have tilted towards profligacy.
India vs world
In general, fiscal deficits (as a percentage of nominal GDP) of major developed economies are seen moderating from the peaks of 2020-21 following the massive stimulus rolled out to deal with the Covid impact on economy. However, current deficit levels remain wider than those recorded in the budget year immediately preceding the pandemic (see chart). Germany, for instance, has moved from a budget surplus into a deficit.
India’s fiscal deficit, by contrast, has contracted from 4.6 per cent of GDP in FY20 to a budgeted 4.4 per cent for FY26. Importantly, certain off-budget expenditures were rationalised and included in the fiscal deficit only from FY22. On a like-to-like basis, the fiscal deficit for FY20 would have been closer to 5 per cent of GDP. Seen through this lens, India’s fiscal position has improved over the period, unlike that of most other major economies.
Deficit to debt
Starting from FY27, India will pivot to the debt-to-GDP ratio as the anchor for fiscal consolidation, moving away from the fiscal deficit to GDP metric. The Union government’s budgeted debt-to-GDP ratio for FY26 stands at around 55 per cent of GDP (GDP per first advance estimates) compared with 50 per cent in FY20. The government has set a medium-term target of reducing this ratio to around 50 per cent by FY31.
The chart shows debt-to-GDP ratios across countries, as compiled by the IMF, which accounts for the outstanding debt of central, state and local governments. While the ratios of the US, China and the UK have expanded sharply — by 16, 37 and 18 percentage points, respectively, — India’s debt ratio has risen a modest 6 percentage points between 2019 and 2025.
The next metric is interest expenditure as a share of total outlay. Per FY26 Budget, this ratio for India has risen 2 percentage points compared with FY20. Here, too, India stands out amidst countries such as the US and the UK, which have seen a material increase in the range of 4-6 percentage points.
Bond yields
The benefits of fiscal consolidation are visible in stable sovereign yields. The chart depicts the point-to-point variation in yields on 10-year sovereign debt securities — from December 31, 2019, till date. Though India’s yields have increased over the past five months — from a 52-week low of 6.1 per cent 6.7 per cent — they remain broadly in line with end-2019 levels. While those of the US and the UK have become over twice and five times, those of Japan and Germany have swung from negative to positive territory — Japan from -0.01 per cent to 2.25 per cent and Germany from -0.19 per cent to 2.85 per cent.
Implications of India’s responsible fiscal governance are far-reaching, in the sense that Indian bonds have found place in multiple global bond market indices and a sovereign credit rating upgrade to BBB from BBB-/ BBB (low) by agencies such as S&P and Morningstar. With India’s debt market deepening, any meaningful decline in sovereign yields should play favourably in the hands of businesses, as their cost of capital will be directly or indirectly linked to the sovereign yield. At a time when the cost of capital in major economies such as the US, the UK, Japan, and Germany has increased significantly relative to pre-Covid levels, this development may be regarded as a macroeconomic achievement for India.
More importantly, in the event of another global economic shock akin to the Covid-19 crisis — countries that have maintained greater fiscal discipline will be better positioned to deploy stimulus measures. Many advanced economies, constrained by elevated debt levels and significantly higher bond yields, may find their policy room far more limited.
Published on January 31, 2026
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