Fiscal Deficit, Public Debt, and Sustainable Growth in India

Abstract

India's fiscal trajectory over the past two decades has been shaped by a continuous tension between the imperative of fiscal consolidation and the need for counter-cyclical public spending to sustain growth. This paper examines the evolution of India's fiscal deficit and public debt following major reforms, including the Fiscal Responsibility and Budget Management (FRBM) Act of 2003 and its 2018 amendment, the introduction of the Goods and Services Tax (GST) in 2017, and the fiscal response to the COVID-19 pandemic. Using secondary data from the Reserve Bank of India, the Ministry of Finance, the Comptroller and Auditor General, and international institutions, the paper analyzes trends in the central government's gross fiscal deficit, the general government debt-to-GDP ratio, and the composition of borrowing across the Centre and states. The findings indicate that although India's fiscal deficit widened sharply during the pandemic, subsequent consolidation has proceeded broadly in line with revised FRBM glide paths, even as public debt remains elevated relative to pre-pandemic levels and relative to peer emerging markets. The paper further examines debt sustainability using standard debt dynamics decomposition, highlighting the critical role of the interest rate-growth differential, off-budget borrowing practices, and state-level fiscal slippage in shaping India's medium-term fiscal outlook. The paper concludes that sustained growth-oriented fiscal consolidation, transparent accounting of contingent and off-budget liabilities, and strengthened fiscal federalism are essential for ensuring that India's public debt trajectory remains compatible with macroeconomic stability and long-term growth.