India Targets Debt-to-GDP Ratio of 55% in FY27: What It Means for the Economy

According to a government source who spoke to Business Standard, the Center is aiming to reduce the debt-to-GDP ratio from the predicted 56.1% for FY26 to about 54.5–55% in FY27. The action would indicate that budgetary consolidation would continue in the next fiscal year, albeit with a calibrated approach.

Debt-to-GDP Ratio: FY27 Targets

The source told Business Standard on condition of anonymity that a final decision on the FY27 consolidation plan would depend on the prognosis for economic development, which will be reevaluated after the publication of the first advance GDP estimates for FY26 on January 7. According to the person, the administration is anticipated to pursue a moderate route of consolidation instead of an aggressive tightening.

Finance Minister Nirmala Sitharaman replaced the long-standing tradition of considering the fiscal deficit as the key operational aim with the debt-to-GDP ratio as the government’s primary fiscal anchor in the FY26 Union Budget. The Center intends to reduce its debt load to 50% of GDP by FY31, allowing for a one percentage point departure on either side, according to the updated glide path described in Budget papers seen by Business Standard.

 

Debt Trajectory and Medium-Term Fiscal Policy

The Center’s debt trajectory for FY27 to FY31 under three nominal GDP growth assumptions—10%, 10.5%, and 11%—was set out in the Medium-Term Fiscal Policy-cum-Fiscal Policy Strategy Statement that was presented in the FY26 Budget. According to Business Standard, the statement described mild, moderate, and high consolidation routes for each economic scenario, providing flexibility based on the level of budgetary restraint the government decided upon.

According to the statement, the approach aims to guarantee that central government debt stays on a transparent and sustainable course while giving operational flexibility to react to unforeseen circumstances. Future budgets will still include yearly fiscal deficit objectives, but these figures will now come from the debt aim rather than serving as the main fiscal objective.

 

Fiscal Deficit and Budget Priorities

Sitharaman emphasized during the presentation of the FY26 Budget that the government will prioritize maintaining annual budget deficits in accordance with a falling debt trajectory. In contrast to the revised projection of 4.8% for FY25, the Center has set the budget deficit for FY26 at 4.4% of GDP. She raised worries about growing debt-to-GDP ratios at the state level earlier this month when she told Parliament that the debt-to-GDP ratio for FY26 would be 56.1%, according to Business Standard.

In its most recent Article IV consultation on India, the International Monetary Fund recommended that the government reevaluate its medium-term debt objective and increase its ambition by accounting for state government obligations. According to Business Standard, the Fund said that quicker fiscal consolidation would assist lower debt-servicing costs sooner and develop buffers against future economic shocks.

CareEdge Ratings and Future Projections

In the meanwhile, CareEdge Ratings has estimated that the budget deficit for FY27 would be between 4.2 and 4.3 percent of GDP, indicating a somewhat slower rate of reduction. However, assuming nominal GDP growth averages around 10.7% over the following five years, the ratings agency thinks the Center may lower its debt ratio to nearly 50% by FY31 with a one percentage point buffer. According to Business Standard, the agency said that establishing a clear debt trajectory will enable the government to modify yearly budget deficits in accordance with changing economic circumstances.

Eighth Pay Commission: DA and Salary Implications

Every ten years, the Center evaluates central government workers’ pay scales, allowances, pensions, and other service benefits. The 7th Central Pay Commission (CPC) officially ended on December 31, 2025, with the 8th CPC scheduled to take effect on January 1, 2026.

The terms of reference (ToR) for the 8th CPC were finalized by the government in November 2025, however it is anticipated that the panel would take about 18 months to present its recommendations. Employees will continue to receive compensation under the current 7th CPC framework at this time and until the Cabinet adopts the new pay system.

 

Salary Handling During Transition

During the changeover phase, what happens to salaries?

The Center will reimburse arrears for the whole interim period after the formal implementation of the 8th CPC. The CPC-recommended fitment factor, a multiplier that transforms the previous basic salary into a new one, will be used to compute these arrears, which will comprise altered basic pay, allowances, retirement benefits, and other components. In earlier pay commissions, this was the customary procedure.

Dearness Allowance (DA) Concerns

The accumulated dearness allowance (DA) is reset to zero and effectively combined with basic pay with the implementation of a new Pay Commission. The fitment factor, which already accounts for the DA merger, is then applied to the previous basic pay to determine the new compensation.

 

For instance, if an employee’s basic pay is Rs 10,000, their DA is Rs 5,000, and their fitment factor is 3, their new basic pay would be Rs 30,000 (Rs 10,000 × 3). In order to guarantee that future raises are computed on a permanently higher salary basis, DA begins again on this higher basic pay and is updated every six months.

Future DA Updates and Labor Suggestions

Thus, the handling of dearness allowance is the current issue. With effect from July 1, 2025, DA was last updated from 55 percent to 58 percent. The next modification is set for January 1, 2026.

Until the new pay commission’s fitment factor is put into effect, DA will continue to be amended every six months. The accrued DA is then combined with the base salary and reset to zero, at which time it begins to rise once again.

Employees are waiting for clarification on whether DA raises would go smoothly or whether a different strategy will be taken into consideration, since the 8th CPC guidelines are expected to be implemented only in 2027–2028.

Alternative Approach by Labor Unions

The head of the All India NPS Employees Federation, Manjeet Singh Patel, has proposed an alternative strategy that avoids a total DA reset.

Patel claims that if DA reaches around 74% by January 1, 2028, the government might include 50% of DA into basic pay and leave the remaining 24% unchanged. The new basic income would subsequently be based on this combined sum.

He contends that in an era of rising inflation, this strategy would better safeguard workers’ buying power.

Fitment Factor and Minimum Wages

Patel also brought attention to the growing salary disparity between workers at various levels. At the moment, Level 18 personnel may make up to Rs 2.5 lakh per month, while Level 1 employees get a base salary of Rs 18,000.

In his opinion, the 8th CPC should increase the number of family consumption units from three to five and take into account a fitment factor of 2.64 when determining minimum wages.

For the purpose of determining need-based minimum wages, the government now takes into account up to three family units: a government employee (one unit), a spouse (0.8 unit), and two children (0.6 units).

What Lies Ahead for Central Government Employees

Employees of the central government are looking for a clear indication from the government as the 7th CPC draws to a close on whether it would continue with the customary DA reset after fitting or look into a compromise that would enable DA to continue without going back to zero. In the early years of the 8th Pay Commission, the ruling will significantly affect take-home pay and arrears.