Strengthening India’s Fiscal Foundations for Viksit Bharat 2047 | 01 Jan 2026

This editorial is based on “​The case for states to adopt fiscal reforms” which was published in The Hindustan Times on 28/12/2025. The article examines India’s growth story and highlights the need for fiscal consolidation to sustain the long term growth rate.

India’s ambition to sustain high growth and achieve developed-nation status by 2047 hinges on strengthening fiscal discipline across both the Centre and the states. While the Centre has reduced its fiscal deficit from 9.2% to 5.6% and public debt from 89% to about 82% of GDP, state-level fiscal reforms remain uneven. Global investors assess India’s general government finances, making coordinated fiscal governance essential. Adopting deeper fiscal reforms at the state level, anchored in debt sustainability and accountability, is thus critical to ensure long-term macroeconomic stability and inclusive growth.

What is India’s Current Fiscal Governance Framework?

• Fiscal Policy: Fiscal policy refers to the government’s use of taxation, public expenditure, and borrowing to influence the economy. 
  
  • It is a key tool through which the government regulates economic growth, employment, inflation, income distribution, and overall macroeconomic stability. 
  • It operates through two major components Revenue Policy (taxation and non-tax revenues ) and Expenditure Policy (capital and revenue spending)
  • India’s fiscal policy is defined by a strategy of "Growth with Consolidation." The government is currently focused on reducing the fiscal deficit while maintaining high levels of capital expenditure (spending on infrastructure) to drive long-term economic growth.
    • Fiscal policy differs from monetary policy which is administered by the central bank to regulate money supply and interest rates.
• Constitutional Framework for Union:  The framework is primarily drawn from Part V (The Union) and Part XII (Finance, Property, Contracts and Suits) of the Constitution.
  • Budgetary Process (Union Level): The Constitution does not use the word "Budget." Instead, it refers to it as the Annual Financial Statement.
    • Article 112: Requires the President to present Parliament with annual estimates of receipts and expenditure.
    • Article 113: Mandates Lok Sabha approval of expenditure from the Consolidated Fund through Demands for Grants, excluding charged expenditure.
    • Article 114 (Appropriation Act): Prohibits withdrawal from the Consolidated Fund without parliamentary sanction.
    • Article 110 (Finance Bill): Classifies taxation proposals as Money Bills, forming the legal basis for tax changes.
  • The Three Public Funds: The Constitution establishes three key public accounts:
    • Consolidated Fund of India (Art. 266(1)): Primary account for government revenues and expenditures.
    • Public Account of India (Art. 266(2)): Funds held in trust by the government; withdrawals do not require parliamentary approval.
    • Contingency Fund of India (Art. 267): Emergency fund to meet unforeseen expenses pending legislative authorization.
  • Fiscal Federalism (Centre–State Relations): The Constitution ensures cooperative fiscal relations between the Union and States.
    • Article 280 (Finance Commission): Recommends vertical and horizontal tax devolution every five years.
    • Article 279A (GST Council): Institutional forum for joint decision-making on GST matters.
  • Grants-in-Aid:
    • Article 275: Statutory grants based on Finance Commission recommendations.
    • Article 282: Discretionary grants for public purposes.
  • Control over Taxation
    • Article 265: Mandates that taxation must have legislative authority.
    • Seventh Schedule: Allocates taxing powers between the Union and States through Union and State Lists.
• Constitutional Framework for States: The constitutional framework for the States mirrors that of the Union but is tailored for regional governance.
  • The State Budgetary Process
    • Article 202 (Annual Financial Statement): Just like the Union, the Governor must lay the estimated receipts and expenditure of the State before the Legislature every year.
    • Article 203 & 204: These ensure that no money is spent without a Demand for Grant voted by the Legislative Assembly and the subsequent passing of an Appropriation Bill.
    • Article 199: Defines Money Bills at the state level (specifically for taxes and borrowing), giving the Legislative Assembly (Lower House) supreme power over the Legislative Council (Upper House).
  • State Funds & Custody: The States maintain three funds identical in nature to the Union's:
    • Consolidated Fund of the State (Article 266): Where all state taxes and revenues are deposited.
    • Public Account of the State (Article 266): For transactions where the state acts as a banker (e.g., state provident funds).
    • Contingency Fund of the State (Article 267): An emergency fund at the disposal of the Governor for unforeseen expenses.
  • Power to Tax & Borrow
    • Seventh Schedule (List II): Grants States exclusive power to tax specific items, including:
      • Agricultural income.
      • Land and buildings.
      • Alcohol for human consumption.
      • Electricity, vehicles, and entertainment.
    • Article 293 (Borrowing): A State can borrow money within India. However, if the State still owes any money to the Union Government, it must obtain the Union's consent before raising a new loan.
  • Fiscal Devolution
    • Article 243-I & 243-Y (State Finance Commission): Every five years, the Governor constitutes a State Finance Commission to recommend how the state's revenue should be shared with Panchayats and Municipalities.
• Legal Framework: India’s fiscal legal framework operationalises constitutional principles through key parliamentary laws governing deficits, debt, and taxation. 
  • The FRBM Act, 2003 anchors fiscal discipline via deficit targets, a debt-to-GDP framework, and mandatory fiscal disclosures; following this, most States enacted their own FRBM Acts. 
    • A key provision of the FRBM Act is the requirement for the CAG to carry out an annual compliance review of the Act. 
    • It also mandates that the government present three statements to Parliament along with the Budget: the Macro-economic Framework Statement, the Medium-Term Fiscal Policy Statement, and the Fiscal Policy Strategy Statement.
  • The Income-tax Act, 2025 (effective April 2026) modernises direct taxation by simplifying provisions and making the new tax regime the default. Indirect taxation is governed by the GST Laws of 2017, with recent reforms strengthening compliance and addressing post-pandemic state revenue challenges.

What are the Key Issues Associated with Fiscal Management in India?

• High Interest Burden and Debt Servicing: A significant portion of India's revenue is consumed by interest payments on past borrowings, leaving limited room for social sector spending. 
  
  • While the debt-to-GDP ratio is gradually declining, the absolute volume of interest remains a "committed expenditure" that creates fiscal rigidity. 
  • Interest payments act as a massive "crowding out" factor, consuming nearly 25% of the total budget and restricting the government’s ability to fund health and education. 
    • In the FY 2025–26 Budget, interest payments  were projected to account for nearly 37% of the Union government’s total revenue receipts.
• Elevated Fiscal Deficit and Slower Consolidation: Despite efforts at fiscal consolidation, the fiscal deficit remains high. For FY 2025-26, the fiscal deficit target is set at 4.4% of GDP, but progress is gradual and pressures persist. 
  • Recent data shows that by April–November 2025, the fiscal deficit had already reached 62.3% of the full-year target (₹9.76 lakh crore), higher than the same period last year, indicating ongoing pressures on revenue and expenditure management. 
• High Public Debt Burden: India’s general government debt (Centre + States) remains significant. In the Union Budget 2025–26, total central government debt was estimated at around 56.1% of GDP. 
  • While there is an aim to reduce this over time, the current level still constrains fiscal space for growth-enhancing expenditure.
• States’ Fiscal Stress and Debt Sustainability : State finances show persistent stress. According to a recent PRS India report drawing on RBI and state budget data, states collectively had outstanding liabilities of about 27.5% of GDP in 2023–24, exceeding the long-term target of 20% of GDP. 
  • 19 states had fiscal deficits above the 3% of GSDP norm in 2023–24. Several states (e.g., Andhra Pradesh, Punjab, Tamil Nadu) continue to struggle with structural imbalances. 
  • Higher debt levels have led to high interest payment obligations across states. Interest payments grew at an annual rate of 10% between 2016-17 and 2024-25, faster than revenue receipts growth of 9.2%.
• Committed Expenditure Crowding Out Development Spending : A significant portion of government budgets goes towards committed and non-discretionary expenditures (salaries, interest payments, subsidies).
  • For states in 2023–24, over 53% of revenue receipts were spent on salaries, interest and pensions, severely limiting the fiscal room for capital outlays and productive investment.
• Centre–State Coordination and FRBM Implementation Gaps: Although the FRBM framework provides fiscal rules, both Centre and states have seen frequent slippages and temporary relaxations. 
  • States often rely on special borrowing provisions and carry forward unutilised borrowing space due to weaker revenue mobilisation and higher committed spending.
• Weak Revenue Mobilisation and Tax Buoyancy Challenges: India’s tax-to-GDP ratio remains relatively low compared with many advanced economies and even some emerging markets, constraining its ability to finance expanding developmental and welfare commitments without increased borrowing.
  • According to World Bank data, India’s tax revenue was only about 6.73% of GDP in 2022 when measured at the central level, reflecting a modest tax share relative to economic output.
  • When combined with state tax collections, India’s overall tax-to-GDP ratio is typically estimated in the range of 11–12% of GDP in recent years, which is significantly lower than the OECD average tax-to-GDP ratio of over 34%, highlighting the gap in revenue mobilisation capacity. 
  • Low tax buoyancy, further complicates fiscal planning; analysts suggest India needs a tax buoyancy of 1.2 to 1.5 to support medium-term growth targets (6.5 to 7%), underlining the need for structural reforms to broaden the base and improve compliance.

What Measures are Needed to Strengthen Fiscal Management in India ?

• Strengthening Fiscal Consolidation and Credible Medium-Term Targets: To address persistently high fiscal deficits, India must adhere to a credible medium-term fiscal consolidation path anchored in debt reduction rather than only annual deficit targets. 
  • The proposed shift towards a debt-to-GDP anchor (around 50% by 2030–31) should be operationalised through clear glide paths for both the Centre and States. 
  • Improved transparency in off-budget borrowings and stricter adherence to FRBM limits, except under well-defined escape clauses, will enhance fiscal credibility and investor confidence.
  • NITI Aayog released the Fiscal Health Index (FHI) Report 2025 to assess sub-national fiscal health and should be utilized to design targeted fiscal reforms for sustainable and resilient economic growth.
• Managing Public Debt and Enhancing Debt Sustainability: Given that general government debt remains elevated, the focus must shift to active debt management. 
  • This includes lengthening debt maturity profiles, reducing interest costs through better timing of issuances, and improving coordination between the Centre and States in market borrowings. 
  • Strengthening the role of the RBI’s debt management framework and developing deeper bond markets can help lower refinancing risks and improve fiscal resilience.
• Addressing State-Level Fiscal Stress: States require a calibrated mix of incentives and discipline. The Centre should link additional borrowing space to measurable fiscal reforms (power sector reforms, subsidy rationalisation, asset monetisation).
  • Encourage adoption of medium-term fiscal frameworks at the state level.
    And promote transparent reporting of off-budget borrowings and guarantees. 
  • Further strengthening state capacity for revenue mobilisation and expenditure prioritisation is essential to prevent persistent debt accumulation.
• Containing Committed Expenditure and Improving Spending Quality: To address this, the government needs to rationalise subsidies through better targeting, especially by expanding Direct Benefit Transfer (DBT) mechanisms that reduce leakages and ensure benefits reach intended beneficiaries. 
  • At the same time, greater priority must be given to capital expenditure such as infrastructure, logistics, and digital assets, which has a higher multiplier effect on economic growth and employment compared to revenue expenditure.
• Enhancing Revenue Mobilisation and Tax Buoyancy: Improving revenue mobilisation requires structural reforms rather than frequent tax rate increases. Broadening the tax base, improving compliance, and leveraging digital tools such as data analytics and AI can significantly improve tax collection efficiency. 
  • Strengthening the GST framework through rate rationalisation, simplification of compliance procedures, and plugging leakages is essential to enhance tax buoyancy. 
  • Additionally, expanding the direct tax base by formalising the informal economy and improving income reporting will help raise India’s tax-to-GDP ratio and reduce dependence on borrowing for financing development needs.
• Strengthening Centre–State Fiscal Coordination: Effective fiscal management in a federal system requires close coordination between the Centre and the States. Regular and structured Centre–State consultations beyond the Finance Commission cycle can help align fiscal priorities and manage macroeconomic risks.
  • Harmonising borrowing norms and fiscal rules across states will promote discipline and reduce imbalances. 
  • Greater transparency in state finances, through standardised accounting and real-time reporting systems, will also improve oversight and trust between different levels of government.
• Improving Institutional Capacity and Fiscal Governance: Strong institutions are essential for sustainable fiscal management. Enhancing the technical and analytical capacity of finance departments and treasuries will improve budgeting, forecasting, and policy evaluation.
  • Independent fiscal institutions can play a vital role in monitoring compliance with fiscal rules and providing objective assessments of public finances. 
  • Wider adoption of outcome-based budgeting and data-driven decision-making will ensure that public spending delivers measurable results and long-term value for the economy.

Conclusion: 

India’s fiscal sustainability hinges on strengthening revenue mobilisation, rationalising expenditure, and adhering to a credible consolidation path. With the goal of reducing the fiscal deficit to around 4.4% of GDP and lowering public debt towards 50% of GDP by 2030–31, disciplined fiscal management is essential. Enhancing capital expenditure, improving tax buoyancy, and strengthening Centre–State coordination will be critical to sustaining high growth. Robust institutions and transparent fiscal governance must support these reforms. Together, these measures are vital for achieving India’s vision of becoming a developed nation by 2047.