The Centre’s move to adopt the debt-to-GDP ratio as its primary fiscal anchor offers greater room to manage public finances without abandoning the commitment to consolidation. A debt-based framework allows temporary deviations while keeping the longer-term trajectory intact, useful when tax revenues are under pressure.
Despite a likely 3.5-4% shortfall in gross tax collections, the Centre may still meet its fiscal deficit target of 4.4% of GDP for 2025-26. This, however, should not be mistaken for an easing of the fiscal challenge. From 2026-27, the burden will shift decisively to expenditure discipline if central debt is to continue to fall as a share of GDP.
The six-year fiscal road map remains a credible guidepost, even if some short-term adjustments become unavoidable. In the medium term, the Centre must aim to reduce its debt ratio to about 50% of GDP—still above the recommended 40%,but a good improvement nonetheless.
What will this move require?
This will also require a recalibration of public capex, which has risen sharply in recent years. While capital spending has supported growth, its pace may need to be moderated to around 3% of GDP from the current 3.4% to remain fiscally sustainable. However, fertiliser and food subsidies continue to operate on an open-ended basis, with little indication of a structural overhaul.
In 2025-26 alone, fertiliser subsidies are expected to overshoot Budget Estimates by Rs 28,000 crore, while food subsidies may exceed outlays by Rs 22,000 crore, on top of substantial provisions of Rs 1.67 lakh crore and Rs 2.03 lakh crore, respectively.
To its credit, the government has sought to contain outlays on large welfare programmes such as PM-Kisan and VB-GRAM G—by keeping spending below the original Budget pace. But regulation is not reform. Without addressing the design and targeting of subsidies, fiscal pressures will persist.
No doubt, many welfare schemes are well intentioned and also function as effective counter-cyclical tools. Targeted transfers can raise purchasing power among those with a high marginal propensity to consume, yielding broader economic benefits and, in some cases, supporting human capital formation. Yet evidence increasingly shows that a significant share of welfare spending is inefficiently allocated.
What do recent findings suggest?
Recent findings suggest that nearly two-thirds of such funds accrue to the richest 10% of households and large farmers. This leakage not only undermines equity but also weakens the fiscal case for expansive subsidies. Against this backdrop, the pilot to link subsidised fertiliser demand to farmers’ land holdings is welcome, if overdue. A thorough review of beneficiaries, supported by better use of technology, is essential.
Measures such as the promotion of nano urea and initiatives like PM-PRANAM to curb chemical fertiliser use are all right moves, even if their impact has been modest. Ultimately, the debate must confront deeper distortions. The economic cost of supplying foodgrains via the PDS continues to rise, while the gap between fertiliser production costs and retail prices has widened dramatically.
Farmers pay a fixed Rs 242 for a 45-kg bag of urea, even as production costs approach Rs 2,650; retail prices are the same since March 2018. P&K fertilisers, despite a so-called fixed-subsidy regime introduced in 2010, remain supported open-endedly. Fiscal credibility will not be secured by changing anchors alone.
It will depend on the political resolve to shift from indefinite input subsidies to policies that ensure remunerative output prices and better terms of trade for agriculture. That transition is harder—but unavoidable—if India is to combine growth with durable fiscal discipline.