On February 1, 2025, Indian Finance Minister Nirmala Sitharaman proposed her record-breaking eighth budget in Parliament. Her budget usually has three signature characteristics: transparency, fiscal prudence, and high capital expenditure (CAPEX). However, in the budgets of 2024-25 and 2025-26, there is a clear tension between the latter two. CAPEX growth has been greatly reduced to meet the promised fiscal consolidation targets.
Earlier, high capital expenditure could be combined with fiscal consolidation (reducing fiscal deficit (FD)) by reducing income (or current) expenditure. As revenue expenditure growth has reached a minimum budget, the FD reduction target can only be achieved by reducing capital expenditure growth. This, in turn, is reflected in a sharp decline in economic growth, hurting the high growth path required by Viksit Bharat – India becomes a high-level country by 2047.
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It has been noted earlier that the rigidity of using reduced FD-GDP ratio as a single monitoring target for fiscal consolidation has been pointed out in advance, and the need to focus on government debt levels is also required.
The 2025-26 budget has been transformed into a new fiscal consolidation framework, with debt and GDP as its main monitoring targets. This is a fundamental repositioning of India’s fiscal framework and has a great impact on public investment and growth.
However, it doesn’t discuss much, as the Mandarin of the North block hides the new framework of the attachment in a more than a dozen different budget documents, a statement of fiscal policy under the FRBM Act that few people read. This article discusses how the new framework works and its impact on our path to Viksit Bharat.
It has long been believed that in India, public investment is “crowded” rather than crowded in private investment, and the growth of capital expenditure has had a very strong impact on GDP growth. In a paper published back in 2011, my co-author and I used a strategy simulation model to quantify and demonstrate this (“Finance Consolidation High Growth: Policy Simulation Models in India,” Economic Modeling). Others demonstrated this using macroeconomic forecasting models.
India’s recent growth experience has confirmed the predictions of these models in the real world. In 2021-22, GDP growth is very high, mainly due to the fundamental effect of co-proof contraction in 2020-21. But during 2022-23 and 2023-24, the growth was 7.6% and 9.2% respectively. Government capital expenditure has increased by 25% and 28% over the years. In 2024-25, the growth of capital expenditure fell to just 7.3%, again limiting to 10% in 2025-26. GDP growth fell to 6.5% in 2024-25 and is expected to be less than 7% in 2025-26. Capital expenditure growth is not the only determinant of GDP growth, but it is clearly a key driver.
By 2047, Viksit Bharat’s goals and the path to growth required for its required fiscal policy support should be observed in this context.
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Nothing is a standard definition for a high-level country. However, the nominal dollar clause measured by the World Bank Atlas method is the accepted benchmark for per capita income. Without the mysterious details of entering this approach, let us say that in 2023, the minimum threshold for the “high-income country” status is $14,005. By comparison, India’s per capita income measured using the same method was $2,540 in 2023.
With the current growth rate of 6.5%, adjusted to 1% population growth and measured by constant prices (2023), India will achieve its status as a high-income country within 30 years (i.e. by 2055). In order to reach that position by 2047, once again allowing a 1% population growth, India must grow at an average annual rate of 8.4%. In other words, our growth rate must be greatly improved.
Based on the close link between GDP growth and CAPEX growth discussed earlier, acceleration of growth will require a significant boost to government capital expenditures, which makes us at the heart of fiscal policy issues.
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This promotion of government capital expenditure will be impossible under the framework of old fiscal consolidation reflected in the FRBM Act and its strict annual fiscal deficit targets. However, the new framework opens up new possibilities for fiscal mergers based on debt-to-GDP ratios. The annual FD is a marginal supplement to the total debt accumulated over the years, indeed for decades. Therefore, the debt-to-GDP ratio gradually changes compared to the FD-GDP ratio. Given nominal GDP, large FDs will increase the FD-GDP ratio much faster than the debt-to-GDP ratio.
This gives us more flexibility and elbow room so that capital expenditure growth can be increased again by 2024-25. This is a necessary condition for the return of India to an average growth path of 8.4% required to reach high-income countries by 2047.
If such a capital expenditure upgrade starts to increase the debt ratio rather than allowing it to slide towards a 50% (+/- 1%) goal, strong measures must be taken. These may include cutting unnecessary subsidies, politically driven handouts, and tax exemptions and concessions. This is only possible in the first half of the election cycle.
These are the author’s personal opinions.
The author is the chairman of the Center for Development Research.
