Fiscal Policy Planning: Why India Needs a Clearer Medium-term Plan

Fiscal Policy in India: Why a Medium-term Framework is Indispensable

The Union Budget 2026-27 marks another attempt at balancing fiscal consolidation with growth imperatives, yet its focus remains overwhelmingly short-term. The prioritization of the debt-to-GDP ratio over annual fiscal deficit is a notable shift, but without a coherent medium-term fiscal planning framework, India's fiscal policy lacks sustainability, credibility, and cohesion between central and state governments.

India consistently returns to a piecemeal approach to fiscal consolidation despite the lessons of past crises, such as that of 1991. While the budget rhetoric signals fiscal prudence, it sidesteps structural reform, particularly a clear medium-term plan to manage public debt and improve expenditure quality. This deficiency is not merely technical; it stands as a systemic governance challenge that undermines accountability and coordination across institutions.

The Institutional Landscape: Legal Provisions and Economic Architecture

India's fiscal policy operates within the framework of the Fiscal Responsibility and Budget Management Act (FRBM) and Article 112 of the Constitution, which mandates the Annual Financial Statement. While the FRBM Act initially set ambitious targets for fiscal discipline, subsequent amendments have repeatedly diluted its strictures. For instance, the FRBM Review Committee, chaired by N.K. Singh in 2017, had recommended that debt-to-GDP for the central government should be contained at 40% by 2025. As it stands, the latest projection—a 55.6% debt-to-GDP ratio for FY 2026-27—is far from this benchmark.

On revenue mobilization, the Economic Survey 2025-26 highlights tax buoyancy as a strength, yet India's tax-to-GDP ratio remains significantly lower than peers like South Africa and Brazil. Meanwhile, rising state-level debt—the Fiscal Health Index flagged debt unsustainability in states such as Punjab, Kerala, and Bihar—brings into question the general government debt target of 50±1% by 2030-31. State-fiscal misalignment could frustrate any central initiative.

Evidence: What Makes Medium-term Planning Essential?

First, consider the sharp increase in capital expenditure to ₹12.2 lakh crore in FY 2026-27, primarily targeting infrastructure projects, from logistics corridors to urban transit systems. While judged positively in isolation, such investments require predictability in fiscal policy over a 5–10-year horizon to anchor investor and market expectations. The absence of a transparent medium-term fiscal plan risks capital inefficiency and misallocated resources.

Second, fiscal consolidation remains sluggish despite real GDP figures (7.4% in FY 2025-26, projected 6.8%-7.2% for FY 2026-27) presenting scope for more robust fiscal discipline. The government claims fragility in recovering from pandemic shocks, but what remains unaddressed is the downward pressure expected mid-decade—a ballooning pension bill under the Eighth Pay Commission and demands arising from the 2029 general election.

Third, the credibility of India's fiscal policy has implications for financing costs. Household financial savings currently hover at 6% of GDP, placing constraints on private capital mobilization due to high government borrowings. NSSO data (2023) notes that nearly 70% of household savings are funneled into government securities—crowding out private investment and raising interest rates.

Globally, countries like Brazil deploy a medium-term expenditure framework (MTEF), mandated under its Constitution, ensuring expenditure targets align with fiscal outcomes over a three-year rolling horizon. Comparatively, India’s omission of a multi-year fiscal strategy eliminates opportunities for stakeholders—including states—to coalesce towards shared policy goals.

Counter-narrative: Strategic Incrementalism or Policy Myopia?

The Ministry of Finance defends its gradual approach to fiscal consolidation, arguing that abrupt fiscal tightening would jeopardize economic growth recovery amid uncertain global conditions. The focus on capital expenditure supports employment and supply-side productivity, striking a balance between immediate growth and long-term fiscal health. Proponents further argue that India’s nominal GDP growth—projected well above interest rates—provides natural debt sustainability.

While plausible, this narrative glosses over structural hazards. Excessive emphasis on nominal growth ignores the risk of external shocks (volatile crude prices, geopolitical tensions) and undermines the necessity for deeper reforms in expenditure quality and intergovernmental fiscal coordination.

International Perspective: The Brazilian Model

Brazil offers a stark contrast to India’s short-term fiscal policy fixation. Its mandatory multi-year expenditure ceilings integrate debt sustainability directly into budgetary planning. Notably, Brazil’s "Golden Rule" restricts borrowing to capital investments only, preventing misuse of loans for revenue expenditures. By comparison, India’s overlapping fiscal targets and discretionary borrowing undermine the transparency needed to anchor long-term fiscal accountability.

Assessment: Towards Structural Reform

India’s fiscal policy must graduate to a transparent and binding medium-term framework—spanning three to five years—that integrates both Union and State government targets. This demands adopting institutional mechanisms akin to a multi-year expenditure framework, obligatory under revised FRBM provisions. Such reforms must also prioritize primary surplus targets and debt ceilings at general government levels.

Absent action, India risks running a fiscal deficit treadmill, even as macroeconomic conditions grow favorable. It is time to replace ad hoc fiscal policy with systemic planning that can reinforce credibility both domestically and in international markets.

Exam Integration

Practice Questions for UPSC

Prelims Practice Questions

Frequently Asked Questions