The Fiscal Deficit is an economic concept that represents the total borrowing requirement of the government in a given financial year. It is defined as the amount by which the government's total expenditure exceeds its total receipts, excluding borrowings. The formula used by economists to calculate it is: Fiscal Deficit = Total Government Expenditure - (Revenue Receipts + Non-debt Capital Receipts). This deficit is typically financed by the government borrowing money, often through the issuance of government bonds.
The formal reporting of the fiscal deficit in India was a recommendation of the Sukhamoy Chakravarty Committee between 1982 and 1985. To institutionalize financial discipline and reduce the deficit, the Parliament of India enacted the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which came into effect on July 5, 2004. The original purpose of the Act was to bring the fiscal deficit down to a manageable 3% of the GDP by March 2008.
The FRBM Act is the central mechanism for fiscal discipline, mandating the government to lay documents like the Medium Term Fiscal Policy Statement before Parliament. The Act's targets were suspended following the 2008 financial crisis. More recently, the government has been on a path of fiscal consolidation, setting a target to reduce the fiscal deficit to 4.5% of GDP by FY 2025-26. The government projected a fiscal deficit of 4.3% of GDP for FY 2026-27 in the Budget. A key change to the framework was the 2018 Amendment to the FRBM Act, which removed the targets for Revenue and Effective Revenue Deficit.