New Delhi – India’s general government debt is currently estimated at about 81 % of GDP, and new projections suggest it could fall to 71 % by FY 2035. According to a recent CareEdge Ratings report, steady growth and fiscal discipline will be critical to that path.
What’s driving the decline?
1. Strong growth assumptions
The report assumes India will sustain GDP growth around 6.5 % in the coming years – this helps reduce the debt burden relative to output.
2. Fiscal consolidation at the Centre
For FY 2025-26, the government has set a fiscal deficit target of 4.4 % of GDP, down from an estimated 4.8 % in the current year. In her budget speech, Finance Minister Nirmala Sitharaman emphasised that this tightening would support a path to lower debt. Reuters notes that the Centre plans to shift its fiscal anchor from deficit targets to a debt/GDP framework starting FY 2026-27. (see more in Reuters coverage)
3. Balancing interest costs and growth
If nominal GDP growth outpaces interest rates over time, the interest burden declines relative to debt – a condition built into the projections. Indeed, CareEdge warns that in FY 2026, the debt ratio could edge up slightly due to lower inflation dampening nominal growth.
Near-term status
- In FY 2024-25, the revised fiscal deficit target is 4.8 % of GDP.
- The government estimates the central government debt will fall to 56.1 % of GDP in FY 2025-26, down from 57.1 % in FY 2024-25. (as per India’s Macro-Economic Framework Statement)
- As borrowing plans go, the government has indicated that the second half borrowing for FY 2025-26 will remain unchanged, pointing to confidence in staying on track.
- On the external front, India’s external debt rose ~10 % in FY 2025 to USD 736.3 billion, lifting external debt’s share of GDP to 19.1 %.
Challenges ahead
- State government liabilities are large, and unless states restrain new borrowing, they may offset gains achieved by the Centre.
- Interest payments remain a sticky burden; if interest rates rise, servicing costs could squeeze other spending priorities.
- Lower inflation / weak nominal growth could slow the reduction in debt ratio. CareEdge itself mentions a possibility of a slight uptick in debt ratio in FY 2026.
- External shocks or capital flow volatility could derail the planned path, especially given India’s growing external debt exposure.
What to watch
- Whether the Centre consistently meets its deficit targets year after year
- How fast states can contain their borrowing
- Trends in interest rates versus nominal GDP growth
- The share of government revenues consumed by interest payments
- External sector resilience to global shocks
If India can thread this needle – growth up, deficits down, interest costs in check – moving from 81 % of GDP to 71 % in a decade may be ambitious but plausible.
