GDP metric hinders crisis response, experts warn

In her 2024 Union Budget speech, Finance Minister Nirmala Sitharaman stated, “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.”

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This sentiment was echoed by Finance Secretary TV Somanathan in an interview. However, using the debt/GDP ratio as a basis for fiscal policy is problematic due to issues with GDP measurement.

Measurement Challenges In India, the reliability of GDP measurement is a significant concern. If GDP cannot be measured accurately, fiscal deficit targets based on the debt/GDP ratio may lead to misguided policy decisions. Projections involving the debt/GDP ratio are highly sensitive to assumptions about interest rates and GDP growth. If the government can borrow at lower rates, it has more room to add to its debt. However, this requires considering various interest rate scenarios and outlining a fiscal strategy accordingly. There’s also an incentive to keep interest rates low for smoother fiscal management.

Interest Payments vs. Revenue Receipts