Context:
Union Government has announced a transition from fiscal deficit to Debt-to-GDP ratio as the primary fiscal anchor starting from FY 2026-27 with an aim to reduce the Debt-to-GDP ratio to 50±1% by 2031.
Fiscal Deficit:
- Difference between the government’s total expenditure and its total revenue (excluding borrowings).
- Indicates the amount of borrowing required to meet government spending needs
- High fiscal deficit indicates- Inflation, devaluation of the currency, increase in the debt burden etc.
- Low fiscal deficit indicates – Positive sign of fiscal discipline and a healthy economy.
- High Fiscal Deficit results in –
- Reduced purchasing power
- Balance of Payment Problems
- Crowding out of Private Investment
Debt-to-GDP Ratio:
- It is the metric comparing a country’s public debt to its Gross Domestic Product (GDP) often expressed as a percentage.
- By comparing what a country owes (debt) with what it produces (GDP), the debt-to-GDP ratio reliably indicates a particular country’s ability to pay back its debts.
- High Debt-to-GDP Ratio: Indicates high borrowings, raising concerns about repayment capacity.
- Low Debt-to-GDP Ratio: Suggests better fiscal health with manageable debt levels.
Source: IE
Previous Year Question
Which one of the following is likely to be the most inflationary in its effect?
[UPSC Civil Services Exam – 2021 Prelims]
(a) Repayment of public debt
(b) Borrowing from the public to finance a budget deficit
(c) Borrowing from the banks to finance a budget deficit
(d) Creation of new money to finance a budget deficit
Answer: (d)