The Union Budget 2025-26 outlines a shift towards the 'debt-to-GDP ratio' as the fiscal anchor governing from 2026-27. Discuss the rationale behind this shift.

Debt to GDP ratio shifts to the amount of public debt (Internal + external) compounded through GDP levels. FRBM (Amend Act) (2015) pegged 3% for central government and 2.5% for state. Rationale behind debt to GDP ratio shift as fiscal anchor

Rigid fiscal deficit target → FRBM Act had pegged it at 3% Need for higher spending by government → Need for generation of 75 million jobs by 2050 annually [World Bank] → To support MSME and generate demand in the market

More funds → More production → More demand → More spending → More deduction → More funds Fiscal deficit targets never adhered to unless only one year. Debt to GDP gives more flexibility for governments and borrowing. However challenges remain: → vague assumption regarding normal GDP (1st optimistic) → lower borrowing → Crowding private sector (high growth) → uncertainty → Fiscal indiscipline → freebies culture → Lack of adequate regulation on spending Therefore, the Golden Rule of fiscal policy of high capex and fiscal consolidation must be adhered to in longer run.

— Ayush Pathak · AIR 215