Why India Requires a New Fiscal Policy Framework After 2025-26

It'll afford the government more flexibility even if it's harder to track and the monetary policy framework may need to adapt

- NIRANJAN RAJADHYAKSHA

The world came to a standstill five years ago. The pandemic that began in China has since receded. Life is normal again. Economic activity in most countries is humming, much as before. However, the costs of the global economic disruption are still evident in government finances. The massive intervention to support households, firms and national economies was inevitably costly. Global public debt is now more than $100 trillion—and still rising.

This is the backdrop against which India's finance minister Nirmala Sitharaman will present the new budget of the Narendra Modi government on 1 February. The pandemic shock derailed Indian public finances. The fiscal deficit of the Union government shot up to 9.5% of gross domestic product (GDP), while public debt soared to 88% of GDP. Compare this with the aspirational goals of keeping the fiscal deficit of the Union government at 3% of GDP and the consolidated public debt of all levels of government at 60% of GDP.

The focus since then was obviously to get Indian public finances back on track. In the budget speech she delivered in 2021, the finance minister announced her intention to gradually bring down the fiscal deficit to 4.5% of GDP over five years, or by fiscal year 2025-26. She did not provide any estimate of public debt for the same time frame.