Fiscal Deficit target

Subject: Economy

Context:

India’s fiscal deficit reached 109% of the full-year target in the first five months of the ongoing financial year as the coronavirus pandemic continued to be a drag on the government’s finances.

Concept:

• The gross fiscal deficit (GFD) is the excess of total expenditure including loans net of recovery over revenue receipts (including external grants) and non-debt capital receipts. The net fiscal deficit is the gross fiscal deficit less net lending of the Central government.
• Generally fiscal deficit takes place either due to revenue deficit or a major hike in capital expenditure. Capital expenditure is incurred to create long-term assets such as factories, buildings and other development.
• A deficit is usually financed through borrowing from either the central bank of the country or raising money from capital markets by issuing different instruments like treasury bills and bonds.

FRBM targets:

• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, intends to bring transparency and accountability in the conduct of the fiscal and monetary actions of the government.
• The rules set targets for the phased reduction of the fiscal deficit to acceptable levels.
• It requires the government to limit the fiscal deficit to 3% of the GDP by 31 March 2021 and the debt of the central government to 40% of the GDP by 2024-25, among others. The Act provides room for deviation from the annual fiscal deficit target under certain conditions.