The central government is likely to stay committed to fiscal prudence in the foreseeable future. It is reportedly aiming at a reduction in the debt-to-GDP (gross domestic product) ratio to 54.5-55 per cent for 2026-27 in the forthcoming Budget, as compared to the 56.1 per cent Budget target for the current fiscal.

In the 2025-26 Budget, Finance Minister Nirmala Sitharaman introduced the new metric of the debt-to-GDP ratio as the primary fiscal indicator, discarding the practice of using the fiscal deficit as the operational target. As per the new glide path, the government intends to scale down the debt-to-GDP ratio to 50 per cent by 2030-31. Given the continuous decline in fiscal and revenue deficits in the last few years, the 50 per cent target appears attainable.

Not only has the fiscal deficit been coming down, but the quality of the fiscal deficit has also shown considerable improvement. The effective capital expenditure for 2025-26 is Rs 1,548,282 crore, which is 98.7 per cent of the estimated fiscal deficit of Rs 1,568,936 crore. In other words, almost the entire amount that the government spends in excess of its income goes into building assets. The improvement can be gauged from the fact that in 2023-24 effective capex was Rs 1,253,111, or 68 per cent of the fiscal deficit of Rs 1,654,643.

The government must always remain mindful of the imperative to follow the glide path. Every year, something unpleasant happens in the country or elsewhere; typically, the finance minister is asked to ‘loosen the purse strings’ because, so goes the argument, this time the situation is drastic, and drastic situations demand drastic measures. The finance minister is beseeched to pause the course of prudence for a one-time exception. The interesting thing is that this exception is sought almost every year!

It is to the credit of the Narendra Modi government that it has not allowed such pleadings to change its course. This is one of the reasons that India has become the fastest-growing major economy, and it is expected to remain so in the foreseeable future. Unsurprisingly, in August, S&P Global Ratings upgraded India’s long-term sovereign credit rating to ‘BBB’ from ‘BBB-’ and its short-term rating to ‘A-2’ from ‘A-3’, with a Stable Outlook.

Such glad tidings should not become the cause of complacency among policy and decision makers, for there are still a lot of worrying aspects of our economy. Perhaps the biggest worry is the lukewarm response of investors, both global and domestic, to put their money in India. Private sector capital expenditure, while improving, remains below potential, and foreign direct investment inflows have shown signs of moderation.

To be sure, a lot of problems with investment are not related to Budget. These pertain to regulatory uncertainty, policy unpredictability, untidy contract enforcement, delays in land acquisition, etc. Such issues call for sustained structural reforms rather than annual fiscal announcements. Nonetheless, the Budget remains a powerful signaling instrument. It can be used to articulate a clear vision for economic reform, announce bold measures to deepen financial markets, simplify compliance, and provide clarity on taxation and regulation.

In the years ahead, maintaining fiscal prudence while simultaneously reigniting private investment will be the central challenge for economic policymakers. Prudence is not an end in itself; it is a means to create a stable macroeconomic environment.