India’s latest quarterly GDP numbers, showing growth of 8.2%, have reinforced optimism just as the Budget session approaches — the season when policy ideas compete for attention. Yet headline growth raises a deeper and more consequential question: what must India do to sustain near-8% growth not just for a year or two, but over the next two to three decades? The answer will determine whether India can credibly achieve its ambition of becoming a developed country by 2047, the centenary of Independence.
Why macroeconomic stability is the essential foundation
Long-term high growth rests on both necessary and sufficient conditions. Among the necessary conditions, macroeconomic stability is paramount. On this front, India’s recent performance has been reassuring. After the pandemic-induced spike, the central fiscal deficit declined from 9.2% of GDP to 5.6% by 2023–24, while public debt eased from a peak of 89% of GDP in 2020 to about 82% by 2024–25.
These numbers matter because sustained growth cannot coexist with chronic fiscal instability. Inflationary pressures, debt overhangs, and recurrent balance-of-payments stress eventually undermine investment and productivity. India today is in a far stronger macro position than in many earlier high-growth phases.
Lessons from three missed growth opportunities
India’s history, however, warns that macro stability alone is not enough. Strong growth has previously coexisted with missed opportunities.
The first came after Independence, when India adopted a development strategy heavily influenced by Fabian socialism. State control over markets, administrative allocation of resources, and protection from competition suppressed productivity in land, labour, and capital. Growth occurred, but far below potential.
The second followed the landmark reforms of 1991, undertaken amid lending programmes with the International Monetary Fund and the World Bank. While dismantling the Licence Raj unlocked growth, reform momentum slowed thereafter. Even earlier, in 1981, India had accessed a then-record IMF lending programme of five billion SDRs but stopped short of deeper structural reforms, especially in factor markets and sub-national public finance.
The third missed opportunity has been more recent: the incomplete reform of fiscal federalism.
Why state finances matter as much as the Centre’s
Fiscal debates in India often focus narrowly on the Union government, particularly around the Budget. Yet investors and international institutions assess the fiscal health of the “general government”, encompassing both the Centre and the states.
This matters for two reasons. First, states account for a large share of public spending and borrowing. Second, India’s Constitution grants states significant fiscal autonomy, making reform politically and institutionally sensitive.
While the Centre enacted the Fiscal Responsibility and Budget Management (FRBM) Acts in 2003 and again in 2017, many states did not meaningfully update their own fiscal responsibility frameworks after 2017. As a result, state-level borrowing and debt dynamics have remained weakly disciplined, even as the Centre tightened its own rules.
Debt as the fiscal anchor: a necessary shift
The Union finance minister’s recent statement that public debt will become the principal fiscal anchor marks an important conceptual shift. The target of bringing central government debt down to 50 ± 1% of GDP by 2030–31 reflects a move away from rigid deficit targets towards a more growth-friendly framework.
This approach draws directly from the logic of the 2017 FRBM Review Committee, which argued that focusing on debt — rather than mechanically cutting deficits — avoids pro-cyclical fiscal tightening during downturns and rewards long-term prudence.
The concern with debt is not new. Even during the Constituent Assembly debates, leaders such as Gopalaswami Ayyangar and B. R. Ambedkar stressed the need for regulating government borrowing and avoiding uncoordinated debt accumulation.
Why markets fail to discipline state borrowing
In theory, borrowing autonomy should create responsibility, with markets disciplining profligate governments through higher borrowing costs. In practice, India’s markets do not adequately differentiate between fiscally prudent and imprudent states.
State Development Loans (SDLs) are priced with little variation, weakening incentives for discipline. This has revived debates around reforming the SDL architecture and even, controversially, the idea of sub-national bankruptcies. The core principle, however, is not centralisation but coordination without eroding autonomy — a solution rooted in cooperative federalism rather than imposed oversight.
Aligning Centre–state macro policies for long-term growth
Sustaining high growth requires aligning the macroeconomic stance of the Centre with that of the states. When the first FRBM Act was enacted in 2003, nearly all states passed corresponding fiscal responsibility laws. That coordination weakened after 2017.
The challenge now is to incentivise states to adopt the updated FRBM framework and the debt-based fiscal anchor. This may require a new institutional mechanism that evaluates the fiscal stance of the general government as a whole, without undermining the constitutional balance between Union and states.
Redefining the State for the next growth phase
Exiting the shadows of Fabian socialism does not mean shrinking the State. It means redefining its role — from controller to enabler, from allocator to regulator. Macroeconomic stability, disciplined but flexible fiscal policy, and coordinated federal governance are the bedrock on which productivity-enhancing reforms can rest.
India’s recent growth numbers show what is possible. Whether this momentum translates into a durable, decades-long expansion will depend on whether policymakers learn from past missed opportunities — and act before the next one slips away.
What to note for Prelims?
- Concept of “general government” fiscal indicators
- FRBM Acts of 2003 and 2017
- Difference between deficit-based and debt-based fiscal anchors
- Role of State Development Loans (SDLs)
What to note for Mains?
- Discuss why macroeconomic stability is a necessary but insufficient condition for sustained growth.
- Analyse the role of fiscal federalism in India’s long-term growth strategy.
- Evaluate the shift towards a debt-based fiscal anchor in India.
- Examine how Centre–state coordination can strengthen macroeconomic governance.
