India to Cap Borrowing for Capital Expenditure from FY27, Urges States to Cut Revenue Spending
New Delhi, March 3, 2025 – The Indian government is set to overhaul its borrowing strategy from FY27, aligning it strictly with effective capital expenditure (capex) while urging states to limit revenue expenditure. The move is part of a broader fiscal consolidation strategy aimed at reducing the overall debt-to-GDP ratio and ensuring sustainable economic growth.
A senior government official confirmed that the Centre will link its bond market borrowings exclusively to capex from FY27 onward, emphasizing the need for fiscal prudence and efficient expenditure management. This initiative follows concerns over rising state-level debt, particularly due to increased spending on subsidies and welfare programs, which have been diverting resources away from critical infrastructure and development projects.
Efforts to Curb India’s Debt-to-GDP Ratio
The government’s fiscal roadmap focuses on bringing down India’s debt-to-GDP ratio from the current 57.1% to 50% by FY31. To achieve this, the Centre is adopting measures to narrow the gap between borrowings and effective capital expenditure while urging states to adopt similar fiscal discipline.
In FY26, the Centre plans to borrow ₹14.82 lakh crore from the bond market in gross terms, while the effective capital expenditure is projected at ₹15.48 lakh crore. The government has already reduced the difference between capex and borrowings to just ₹21,000 crore for FY26, ensuring that borrowed funds are utilized primarily for development rather than operational expenses.
“The gap between effective capex and borrowings is now just 0.2% of GDP. From next year, the government will borrow only to fund capital expenditure. We are not just nudging states; we are actively pushing them to focus more on capex and limit revenue expenditure,” the official stated.
State Governments Under Pressure to Cut Revenue Spending
While the Centre is taking steps to streamline its borrowing strategy, many states continue to increase spending on revenue-heavy schemes such as cash transfers and subsidies, particularly in the lead-up to elections.
A recent study by the National Council of Applied Economic Research (NCAER) warns that by FY28, more large states may cross the 40% debt-to-GDP threshold, with Punjab likely to exceed 50% under current spending trends. The Fiscal Responsibility and Budget Management (FRBM) Act recommends a combined 60% debt-to-GDP ratio, with 40% allocated to the Centre and 20% to states. However, multiple states have exceeded this benchmark due to unsustainable revenue expenditure.
International Credit Ratings and Fiscal Stability
India’s decision to adopt the debt-to-GDP ratio as a fiscal anchor from FY27 has raised expectations for a potential sovereign credit rating upgrade. Global rating agencies closely monitor India’s overall debt levels, making state-level fiscal discipline crucial for an improved credit outlook.
To ensure stability, the Centre aims to maintain a fiscal deficit between 4.9% and 5.1% of GDP in the years leading up to FY31. The government is taking proactive steps to align borrowings with productive spending, an approach that could strengthen investor confidence and improve India’s global financial standing.
Finance Minister Stresses Prudent Borrowing
Finance Minister Nirmala Sitharaman recently reaffirmed the Centre’s commitment to using borrowed funds primarily for capital expenditure.
“For FY26, nearly all borrowings are being directed toward capital expenditure. None of it is being allocated for revenue or committed expenditure,” Sitharaman stated.
The government’s fiscal deficit target for FY26 is set at 4.4% of GDP, while effective capital expenditure is expected to account for 4.3% of GDP.
Challenges Ahead for Fiscal Consolidation
While the Centre has made significant strides in linking borrowings with productive investments, the challenge lies in ensuring that states follow suit. Experts caution that populist spending ahead of elections could continue to strain state finances, making it imperative for the government to enforce stronger fiscal accountability at both national and state levels.
Moreover, with global economic uncertainties and inflationary pressures, maintaining fiscal discipline without stifling growth will require a delicate balancing act.
A Step Towards Sustainable Economic Growth
By restricting borrowings to capital expenditure and pushing states to curtail non-productive revenue spending, the government is laying the groundwork for a more resilient and financially sustainable economy. These measures are expected to improve India’s fiscal health, enhance creditworthiness, and boost long-term investor confidence.
However, the success of this fiscal realignment depends on strict implementation and state-level cooperation, as India seeks to transition toward more disciplined and growth-oriented financial policies.
