Abstract:-

Since the outbreak of Covid pandemic, India has adopted capex-based fiscal policy to sustain growth momentum, by increasing the government’s capital expenditure to GDP ratio more than two-fold compared to the pre-covid value. Gross fiscal deficit to GDP ratio of the central government peaked from 4.2% in pre-covid years to 9.2% during covid, deviating from the FRBM target of 3% in the process. The central government debt to GDP ratio also surged to 62.6% in 2020-21 from the pre-covid value of 51.4%, and away from the FRBM target of 40%. In the subsequent years, the government attempted to maintain fiscal discipline in terms of lowering fiscal deficit to GDP ratio and debt to GDP ratio through glide paths, while keeping capital spending as the key policy thrust. The fiscal consolidation path announced in the 2021-22 Union Government Budget targeted a fiscal deficit below 4.5% of GDP by 2025-26, which was further lowered to 4.3% of GDP in Budget 2026–27. Union Budget 2025-26 introduced a new glide path for the debt-to-GDP ratio during period 2026-27 to 2030-31 as the primary fiscal anchor. The current fiscal consolidation strategy is thus operationalised through a multi-year fiscal glide path for debt-to-GDP ratio with a target of lowering it to 50 (±1) % by 31 March, 2031(Ministry of Finance, 2025). In this backdrop, our study explores macro-fiscal implications of consolidation measures under the new fiscal anchor.  To this vein,  we develop a Two-Agent New Keynesian DSGE model  with endogenous human capital accumulation adding to the stock of quality adjusted labour force with lags. It evaluates alternative paths toward the newly adopted fifty per cent debt-to-GDP anchor.  Our simulations yield four key findings. First, India’s current consolidation trajectory, while macroeconomically sound, does not achieve the 50% debt-GDP target until approximately FY2036-37 — roughly six years beyond the targeted horizon. Second, capital expenditure compression is self-defeating: it generates stagflationary dynamics and misses the target as well. Third, overall revenue expenditure rationalisation is the only strategy achieving the target within the horizon, albeit at significant short-run welfare costs concentrated among liquidity-constrained households, and in the long run, at the cost of overall growth moderation via the channel of human capital formation. Fourth, and most importantly, reallocation of public spending towards social goods and services in both capital and revenue account yields the largest long-run human-capital and output dividend, which materialises largely beyond the policy window. Hence, India’s standard fiscal planning horizon of five to six years therefore systematically undervalues public spending reallocation to social account, as the bulk of its productivity dividend accrues precisely beyond the policy window.