Context:
The Union Budget 2026-27 signals a shift in fiscal policy by anchoring government finances around the debt-to-GDP ratio, targeting 50% ±1% by 2030-31, rather than focusing solely on the fiscal deficit.
Key Highlights:
- New Fiscal Policy Anchor
- The government plans to manage public finances through a debt-to-GDP target of about 50% by 2030-31.
- This approach aligns with recommendations of the Fiscal Responsibility and Budget Management (FRBM) Review Committee.
- Investment Challenges
- Private corporate investment remains stagnant at 10–11% of GDP despite improved capacity utilization and healthier bank balance sheets.
- Disinvestment Strategy
- The government aims to raise ₹80,000 crore through divestment.
- These funds will create fiscal space for investments in infrastructure, health, and education.
- Banking Sector Review
- A committee will assess the structure of India’s banking sector to support the long-term vision of Viksit Bharat by 2047.
Relevant Prelims Points:
- Fiscal Deficit
- The gap between the government’s total expenditure and total revenue (excluding borrowings).
- Debt-to-GDP Ratio
- Ratio of a country’s public debt to its gross domestic product, indicating ability to repay debt.
- FRBM Act (Fiscal Responsibility and Budget Management Act)
- Enacted in 2003 to ensure fiscal discipline and reduce deficits.
- Divestment
- Sale of government equity in public sector enterprises to raise resources and improve efficiency.
Relevant Mains Points:
- Significance of Debt-Based Fiscal Targeting
- Focusing on debt sustainability offers a broader measure of fiscal health than the fiscal deficit alone.
- It provides flexibility in managing expenditure during economic cycles.
- Private Investment Slowdown
- Weak private capital expenditure indicates structural issues such as global trade uncertainty, domestic demand fluctuations, and policy unpredictability.
- Role of Fiscal Space
- Divestment and fiscal consolidation allow the government to invest more in public infrastructure, social services, and productivity-enhancing sectors.
- Banking Sector Evolution
- The committee reviewing the banking system may consider the role of banks, NBFCs, and capital markets in financing long-term growth.
- Challenges
- Achieving debt targets depends on nominal GDP growth and fiscal discipline at both Union and State levels.
- Declining household financial savings may limit domestic investment resources.
- Way Forward
- Strengthen fiscal consolidation while maintaining growth-supportive spending.
- Improve investment climate to revive private capex cycle.
- Deepen financial markets and strengthen banking sector capacity.
- Use trade agreements to enhance global market access and supply-chain integration.
UPSC Relevance:
- GS Paper III: Fiscal policy, public finance, economic growth.
- GS Paper II: Institutional reforms and governance in financial sector.