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The Union Budget is one of the most anticipated financial statements in India, shaping the economic direction of the country. The 2025 Budget marks a significant shift in India’s fiscal policy by adopting the Debt-to-GDP ratio as the primary fiscal anchor. This policy decision is aimed at ensuring macroeconomic stability, maintaining fiscal discipline, and driving long-term economic growth.
For UPSC aspirants, understanding the nuances of this budget is crucial, as it covers topics related to economics, governance, and public finance, which are frequently tested in both Prelims and Mains.
What is the Debt-to-GDP Ratio?
The Debt-to-GDP ratio is the proportion of a country’s total debt to its gross domestic product (GDP). It is a critical indicator of a nation’s financial health, reflecting its ability to repay its debts.
Mathematically, it is expressed as:
Debt−to−GDPRatio=TotalPublicDebtGrossDomesticProduct×100Debt-to-GDP Ratio = \frac{Total Public Debt}{Gross Domestic Product} \times 100
A high Debt-to-GDP ratio implies that a country might struggle to meet its obligations, while a lower ratio suggests economic stability and fiscal prudence.
Why Has India Adopted This Fiscal Anchor?
The traditional fiscal deficit target has limitations in ensuring long-term sustainability of public finance.
Rising debt levels, especially post-pandemic, necessitate a more structured approach to fiscal consolidation.
International agencies like the IMF and World Bank emphasize sustainable debt as a key metric for financial credibility.
Many developed nations, including the European Union, use debt-to-GDP ratio limits to manage fiscal health.
Key Changes in Fiscal Policy
Debt-to-GDP Target: The government has set a medium-term debt-to-GDP ratio target of 60% (40% for the Centre and 20% for states).
Reduction in Fiscal Deficit: A roadmap to reduce the fiscal deficit to 4.5% of GDP by FY 2027 has been outlined.
Expenditure Rationalization: Non-essential subsidies and inefficient expenditures will be phased out gradually.
Revenue Enhancement: Increased direct tax collections, better GST compliance, and new disinvestment targets will help in improving revenue.
Economic Impacts
Inflation Control: A structured fiscal policy reduces excessive borrowing, helping curb inflation.
Investor Confidence: Lower debt ensures a stable economy, attracting foreign and domestic investments.
Credit Rating: A better Debt-to-GDP ratio improves India’s sovereign credit rating, reducing borrowing costs.
Sustainable Growth: Ensuring manageable debt levels promotes long-term economic stability.
Social Sector Impact
Welfare Expenditure: A shift from indiscriminate subsidies to targeted welfare programs will improve efficiency.
Healthcare & Education: Increased fiscal space allows for better public spending on health and education.
Infrastructure Development: More capital expenditure will be directed towards roads, railways, and digital infrastructure.
Prelims Perspective
Key figures: Debt-to-GDP ratio targets, fiscal deficit targets.
Terminologies: Fiscal anchor, revenue deficit, primary deficit.
Schemes & Initiatives: Changes in taxation, subsidy reforms.
Mains Perspective
Essay Topics: “Fiscal Prudence vs. Welfare Spending”, “Debt-to-GDP Ratio as a Measure of Economic Health”.
GS Paper III: Economic Development – Fiscal policy, taxation, economic growth.
GS Paper II: Governance – Public finance management, intergovernmental fiscal relations.
Challenges
Political Resistance: Fiscal consolidation may face resistance due to electoral pressures.
Revenue Generation: Tax buoyancy needs to improve to meet deficit reduction targets.
Global Uncertainties: External shocks like oil price fluctuations and geopolitical tensions can impact fiscal stability.
Way Forward
Strengthening GST implementation for better tax collection.
Increasing public-private partnerships (PPP) for infrastructure projects.
Enhancing state cooperation for better fiscal discipline at sub-national levels.
The Union Budget 2025 marks a paradigm shift in India’s fiscal policy by prioritizing debt sustainability over short-term fiscal deficit targets. By adopting the Debt-to-GDP ratio as a key fiscal anchor, the government aims to ensure macro-economic stability and long-term growth.
For UPSC aspirants, this budget is a crucial topic for Prelims and Mains, offering insights into India’s economic strategy, governance priorities, and fiscal prudence. Understanding these aspects will enhance aspirants’ ability to analyze and answer questions effectively in the exam.
Maximize the benefits of mock tests for IAS and KAS preparation with guidance from Amoghavarsha IAS Academy . For more details, visit https://amoghavarshaiaskas.in/.
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