Sudipto Mundle: The path to Viksit Bharat must be paved with a clear fiscal strategy

Earlier, high capex could be combined with fiscal consolidation—reduction of the fiscal deficit (FD)—by cutting down on revenue (or current) expenditure. With revenue expenditure growth already pared to a minimum in earlier budgets, the FD reduction target could only be met by also cutting back capex growth. This was in turn reflected in a sharp reduction in economic growth, compromising the high-growth path required for Viksit Bharat—India becoming an advanced country by 2047.

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The inflexibility of using reduction of the FD-to-GDP ratio as the single monitoring goal for fiscal consolidation had already been noted earlier, as also the need to focus on the level of government debt.

The 2025-26 budget has shifted to a new fiscal consolidation framework with debt-to-GDP as the key monitoring target. It is a fundamental reorientation of India’s fiscal framework with far- reaching implications for public investment and growth.

However, it has not been much discussed because the mandarins in North Block have tucked away the new framework in an annexure to one of over a dozen different budget documents, The Statement on Fiscal Policy under the FRBM Act, which few people read. This article discusses how the new framework is likely to work and its implications for our path to Viksit Bharat.

It has long been believed that in India public investment ‘crowds in’ private investment instead of crowding it out, and that capex growth has a very strong impact on GDP growth. In a paper published way back in 2011, my co-authors and I quantified and demonstrated this using a policy simulation model (‘Fiscal Consolidation with High Growth: A policy simulation model for India,’ Economic Modelling). Others have demonstrated this using macro-econometric forecasting models.

These model predictions have been confirmed in the real world by India’s recent growth experience. GDP growth was very high in 2021-22, mainly due to the base effect of the covid-pandemic contraction in 2020-21. But growth was high at 7.6% and 9.2% respectively during 2022-23 and 2023-24. Government capex grew at 25% and 28% during these years. Capex growth was cut back to just 7.3% in 2024-25 and has been limited again to 10% in 2025-26. GDP growth came down to 6.5% in 2024-25 and is projected at less than 7% in 2025-26. Capex growth is not the only determinant of GDP growth, but it is clearly a key driver.

The required growth path to reach the goal of Viksit Bharat by 2047 and the fiscal policy support needed for it should be viewed against this background.

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There is no standard definition of what is an advanced country. However, a widely accepted benchmark is per capita income in nominal US dollar terms as measured by the World Bank Atlas method. Without getting into the arcane details of this method, let it suffice to say that in 2023, the most recent year for which the relevant data is available, the minimum threshold for ‘high income country’ status was $14,005. Compared to that, India’s per capita income, measured using the same method, was $2,540 in 2023.

At the present growth rate of 6.5%, adjusted for 1% population growth and measured at constant (2023) prices, India would achieve high income country status in 30 years (i.e., by 2055). To achieve that status by 2047, again allowing for 1% population growth, India must grow at an average annual rate of 8.4%. In other words, our growth rate will have to be significantly stepped up.

Based on the close link between GDP growth and capex growth discussed earlier, growth acceleration will require a very significant boost to government capex, and this takes us to the heart of the fiscal policy question.

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Under the old fiscal consolidation framework as embodied in the FRBM Act and its rigid annual fiscal deficit targets, such a boost to government capex would be out of the question. But the new framework, which anchors fiscal consolidation in the debt-to-GDP ratio rather than FD-to-GDP ratio opens up new possibilities. The annual FD is a marginal addition to the total debt stock accumulated over many years, indeed decades. Hence the debt-to-GDP ratio changes very gradually compared to the FD-to-GDP ratio. Given a nominal GDP, a large FD would raise the FD-to-GDP ratio much faster than the debt-to-GDP ratio.

This offers us more flexibility and elbow room to again step-up capex growth, as seen prior to 2024-25. That is a required condition for getting India back to the 8.4% average growth path necessary to reach high-income-country status by 2047.

If such a capex step-up starts raising the debt- to- GDP ratio instead of enabling it to glide down towards the 50% (+/- 1%) target, then strong measures will be necessary. These may include cutting unwarranted subsidies, politically driven handouts and tax exemptions and concessions. This is possible only during the first half of an electoral cycle.

These are the author’s personal views.

The author is chairman, Centre for Development Studies.