Somanathan explains shift from fiscal deficit targeting to debt-to-GDP reduction 

In her budget speech last week, the finance minister, Nirmala Sitaraman, said that from 2026-27, “our endeavor will be to keep the fiscal deficit each year such that the Central Government debt will be on a declining path as percentage of GDP.” 

Explaining this at a post-budget discussion organized by businessline today, the Union Finance Secretary, Dr T V Somanathan, observed that all these years the budget would fix a declining fiscal deficit target as a percentage of the GDP, regardless of the rate of GDP growth.

For example, the fiscal deficit target for 2024-25 has been fixed at 4.5 per cent of the GDP. From 2026-27, this will change. 

“From 2026-27, we will set a deficit target in such a manner that the government debt-to-GDP comes down,” Somanathan said, implying that the accent would be on bringing down debt-to-GDP ratio rather than the fiscal deficit.  

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This approach gives up the holy grail of limiting fiscal deficit to 3 per cent of GDP, a target which, Somanathan said, “has no scientific basis.” He said the ‘3 per cent target” probably had its origins in the 1992 Maastricht Treaty of 12 European Union countries and became a benchmark of sorts for other countries.  

“Fiscal deficit will decline, but how far, how fast, we cannot say,” Somanathan said, adding that the deficit would certainly be below 4.5 per cent of the GDP but may not be 3 per cent.  

STT hike may fetch ₹5-7000 crore

Answering a question on the hike in Securities Transaction Tax (STT, from 0.0625 per cent to 0.1 per cent of the option premium in the case of options, and from 0.0125 per cent to 0.02 per cent of the price for futures), Somanathan said that he expected an additional revenue between ₹5,000 crore and ₹7,000 crore, but noted that it depended upon how much of a dampener it would be on speculative transactions. 

“How much the speculation will go down in my speculation,” he said, adding that the idea was to throw “some incremental sands on the wheels of speculation.”

He admitted that futures and options play a role by helping investors hedge their bets and said the government did not want to stop speculation—in which case it could have banned it.

However, in the derivatives market an investor could “get wiped out in one day”, which cannot happen in the cash market. So, the idea was to nudge retail investors, especially the small investors who may not understand the risks of the derivatives market, into the cash market, and at the same time get some revenues. 

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