What debate? Reducing debt is the same as tightening the fiscal deficit.

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Subscribe to enjoy similar stories. Conceptually, for the administration of any country, targeting its debt-to-gross domestic product (GDP) ratio is tantamount to controlling its fiscal deficit ratio. It is not possible to influence the debt ratio without a firm grip on the fiscal deficit.

This issue has been on the discussion table of late. The question is whether we should be obsessed with attaining a fiscal deficit of 3% or should we realistically look at achieving a debt-to-GDP ratio of around 60%. A notable point is that the fiscal deficit in itself may not be significant from the perspective of economic sustainability, but it is the most important component of future debt.

The fiscal deficit is financed mostly by borrowings by the central and state governments. These get added to the debt of the country. In India, typically, the debt ratio of the Centre is twice that of the states taken together.

In 2023-24, for instance, the states had a debt-to-GDP ratio of 28.2%, while the Centre’s was double that proportion, at 57.1%, taking the country’s total to 85.3%. It has been observed that the Centre’s debt ratio increased sharply from 50.7% in 2019-20 to 60.7% in covid-year 2020-21, mainly on account of its fiscal deficit ratio doubling to 9.2% of GDP. A similar rise was observed for states, although their combined debt ratio rose less steeply, from 26.6% to 31.1%, with their deficit ratio rising from 2.6% to 4.1%.

In years when the fiscal deficit ratio came down, the debt-to-GDP ratio also moved south, and vice-versa. It is certain that only when the fiscal deficit is reduced can the debt-to-GDP ratio come down. What is open to discussion is whether India’s fiscal deficit ratio should be 3% or 4%.