Economists attending the Prime Minister’s pre-budget interaction have flagged growing fiscal pressures arising from rising interest obligations, weakening household savings and potential crowding-out of private investment, even as the government continues to rely on an elevated public capital expenditure push to support growth, Moneycontrol has reported.
Prime Minister Narendra Modi at the meeting emphasised the importance of addressing the aspirations of the nearly 25 crore people estimated to have moved out of poverty in recent years through improvements in health, education, jobs, skills and infrastructure, sources said.
Capex needs to be lower
Some of the senior economists, who participated in the meeting, said there was a need for “…aligning fiscal policy more closely with the original Fiscal Responsibility and Budget Management (FRBM) framework, including a call to recalibrate government capital spending to around 3 per cent of gross domestic product (GDP) from the current level of above 3 per cent.”
“It is important to return to the spirit of the original FRBM framework. Public capital expenditure should gradually be brought closer to 3 per cent so that more financial resources are available for the private sector,” a source told Moneycontrol. In the FY26 Budget, the government budgeted around ₹11.21 lakh crore for capital expenditure, higher than 3 per cent of GDP.
Household savings
Concerns over the sharp decline in household financial savings also figured prominently in the meeting, with participants warning that weakening domestic savings could constrain financing options for both the government and the private sector.
“Household financial savings have fallen from around 10 to 10.5 per cent of GDP earlier to about 7 to 7.5 per cent now. With domestic savings dwindling and foreign capital flows becoming uncertain, even financing a 2 per cent current account deficit could become challenging unless savings recover,” the economists noted.
The person added that sustained high public capex, combined with falling household savings, was tightening liquidity and raising bond yields.
“Private capital expenditure is ultimately more efficient than public capex. The objective is not to cut investment, but to calibrate it so that the private sector has the financial space to expand. That is fully consistent with the philosophy of the FRBM framework,” he said.
Almost 25 per cent of the government expenditure goes for interest payments.
Participants also drew attention to the rising share of interest payments in the government’s expenditure profile, warning that the trend could weigh on fiscal flexibility over the coming years. The Eighth Pay Commission could further add to debt levels.
“The concern is not only the level of borrowing, but the fact that interest payments have been increasing steadily. Today, roughly 25 to 28 per cent of total government expenditure is going towards servicing interest. That means nearly 25 paise out of every rupee spent is absorbed by interest payments alone,” the person said, adding that pressures such as the Eighth Pay Commission could further add to debt levels.
“Citing Japan as an example of an economy with very low or negative interest rates, the economists said India’s comparatively higher cost of government borrowing makes its debt dynamics far more vulnerable to fiscal slippages,” he said.
The meeting was attended by finance minister Nirmala Sitharaman, principal secretaries to PM P.K. Mishra and Shaktikanta Das, Niti Aayog vice-chairman Suman Bery, chief economic adviser V. Anantha Nageswaran, Niti Aayog CEO BVR Subrahmanyam and other members of the Aayog, PTI reported.
Several renowned economists and experts were part of the discussion, including former CEA Shankar Acharya, Ashok K. Bhattacharya, N.R. Bhanumurthy, former RBI MPC member Ashima Goyal, Dharmakirti Joshi, Umakant Dash, Pinaki Chakraborty, Indranil Sen Gupta, Samiran Chakraborty, Abhiman Das, Rahul Bajoria, Monika Halan and Siddhartha Sanyal.
4th-largest economy
India has surpassed Japan to become the world’s fourth-largest economy with a size of $4.18 trillion, and is poised to overtake Germany to become the third-largest by 2030, the government has said. With continuing good growth numbers, India is also the world’s fastest-growing major economy.
India’s real GDP grew 8.2 per cent in the second quarter of 2025-26, up from 7.8 per cent in the first quarter and 7.4 per cent in the fourth quarter of the last fiscal.
“With GDP valued at $4.18 trillion, India has surpassed Japan to become the world’s fourth-largest economy, and is poised to displace Germany from the third rank in the next 2.5 to 3 years with a projected GDP of $7.3 trillion by 2030,” according to a government release providing a snapshot of reforms in 2025.
The US is the world’s largest economy, and China occupies the second spot.