Context:

India’s fiscal deficit in the first two months of 2021-22 stood at 8.2% of the Budget target with revenue receipts rising even as spending contracted by the end of May.

Fiscal Deficit

• Definition: The difference between total revenue and total expenditure of the government is termed as fiscal deficit.
• It is an indication of the total borrowings needed by the government. While calculating the total revenue, borrowings are not included.
• Description: 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 Act

• The FRBM Act aims to introduce transparency in India's fiscal management systems.
• The Act‘s long-term objective is for India to achieve fiscal stability and to give the Reserve Bank of India (RBI) flexibility to deal with inflation in India.

The FRBM Act was enacted to introduce more equitable distribution of India's debt over the years.

Key features of the FRBM Act

• The FRBM Act made it mandatory for the government to place the following along with the Union Budget documents in Parliament annually:

1. Medium Term Fiscal Policy Statement
2. Macroeconomic Framework Statement
3. Fiscal Policy Strategy Statement

• The FRBM Act proposed that revenue deficit, fiscal deficit, tax revenue and the total outstanding liabilities be projected as a percentage of Gross Domestic Product (GDP) in the medium-term fiscal policy statement.

N K Singh Committee's recommendations were as follows

• Targets: The committee suggested using debt as the primary target for fiscal policy and that the target must be achieved by 2023.
• Fiscal Council: The committee proposed to create an autonomous Fiscal Council with a chairperson and two members appointed by the Centre (not employees of the government at the time of appointment)
• Deviations: The committee suggested that the grounds for the government to deviate from the FRBM Act targets should be clearly specified
• Borrowings: According to the suggestions of the committee, the government must not borrow from the RBI, except when

1. the Centre has to meet a temporary shortfall in receipts
2. RBI subscribes to government securities to finance any deviations
3. RBI purchases government securities from the secondary market

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