India’s gross general government (GGG) debt-to-GDP could edge up marginally in FY26 from an estimated 81% in FY25 as lower inflation dampens nominal GDP growth. However, the medium-term debt dynamics remain intact, with India’s GGG debt-to-GDP projected to moderate to around 77% by FY31 and further to 71% by FY35, according to an analysis by Care Edge Ratings.

The gradual decline in India’s general government debt level is expected due to the Centre’s continued commitment to fiscal consolidation and the sustenance of GDP growth momentum of around 6.5% in the medium term. While sticky aggregate state debt remains concerning in the midst of the dole out of freebies by some states, it is not alarming as yet, the rating agency states.

According to Care Edge, while the moderating government debt level is a positive aspect for India’s fiscal position, it fares poorly in terms of debt affordability, with the combined interest payments of the Centre and State governments averaging 25.5% of revenue receipts over the last five years. A cross-country comparison by the agency revealed that India’s interest burden remains the highest among other economies. While India’s general government interest payments (% of revenue receipts) were at 25.5%, they were 13.3% for Indonesia, 13.9% for the Philippines, 5.8% for Thailand, and 3.5% for China. Among advanced economies, this ratio ranged from 7% to 15% for the US, UK, and Italy, whereas it was significantly lower for economies such as Japan (4.2%), France (3.3%), and Germany (1.7%).

The agency also noted that, in addition to its already elevated debt burden, India’s weak debt affordability can be attributed to two key factors: elevated interest rates and a relatively narrow revenue base. “Historically, advanced economies have benefited from lower effective interest rates on government debt, averaging 2.2% during the last decade, compared to emerging markets at 3.7%. Even among emerging economies, India’s effective nominal interest rate on general government debt was higher, at around 7%, during the last decade”, the report said.

Another challenge in India’s fiscal landscape was pointed out as its relatively lower tax base (tax-to-GDP ratio). India’s general government tax-to-GDP ratio averaged 17.7% over the last five years, which is significantly lower compared to advanced economies such as France (30.2%), Canada (29.2%), and Italy (28.8%), among others. However, India’s ratio is seen to be higher than that of some other emerging economies, such as China (16.1%), Thailand (15.9%), the Philippines (15.2%), and Indonesia (10.9%), the report said.