Context: In this episode of the Perspective Prog. based on 'Investment and Fiscal Deficit'. United Nations’ ‘World Economic Situation and Prospects 2022’ report has stated that India’s economic recovery is on a solid path. 

• The UN report credited the vaccination drive, less stringent social restrictions, and supportive monetary stances as reasons for this growth adding that encouraging private investment will remain crucial to stay on the recovery path. 
• Government has implemented several major reforms in recent years to boost investment and GDP growth. Various measures to support broad-based and inclusive economic development were announced in Union Budget 2021-22 followed by a relief package in June 2021 to strengthen public health and provide impetus for growth and employment measures. 
• On the fiscal deficit front the rating agency ICRA in its recent report says that though government's gross tax receipts is expected to overshoot the budgeted amount, the shortfall in disinvestment target this year may lead to a fiscal deficit of around 7 per cent of the GDP.

What is a Fiscal Deficit?

• The fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowing). A fiscal deficit occurs when this expenditure exceeds the revenue generated.
• Fiscal deficit is when a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings). 
• The deficit does not mean debt, which is an addition of annual deficits.

What is the Formula of Fiscal Deficit?

• Fiscal Deficit = Total Expenditure (Revenue Expenditure + Capital Expenditure) – (Revenue Receipts + Recoveries of Loans + Other Capital Receipts (all Revenue and Capital Receipts except loans taken))
• Gross Fiscal Deficit (GFD) of the government is the surplus of its total expenditure, current and capital, as well as loans net of recovery, above revenue receipts (including external grants) and non-debt capital receipts.
• A fiscal deficit happens because of events like a major increase in capital expenditure or due to revenue deficit. 
• Capital expenditure is incurred to create long-term assets like buildings, factories, infrastructure development, etc.
• Fiscal deficit serves as an indicator of how well the government is managing its finances.
• A recurring high fiscal deficit implies that the government has been spending beyond its means.
• However, the fiscal deficit is seen in almost every economy while the fiscal surplus is quite rare. The high fiscal deficit is not always a negative thing if the amount is utilised for constructing roads, airports, infrastructure, etc. since these will generate revenue in the long run.
• Fiscal Consolidation refers to the policies undertaken by governments (national and sub-national levels) to reduce their deficits and accumulation of debt stock. 

India’s Fiscal Policy Framework

Here are some interesting facts about India’s fiscal policy agenda

• The Indian Constitution has provided directives for the formation of a Finance Commission (FC) every five years.
• This is to provide the basis for the assignment of some of the centre’s revenues to the state governments and provide medium-term direction on fiscal matters, as the taxing capacity of the states are not necessarily proportionate with their spending responsibilities.
• The Union Budget where the government shall put before the Parliament an account of its proposed taxing and spending provisions for legislative debate and approval is also an important part of fiscal policy.
• The Fiscal Responsibility and Budget Management Act (FRBM) 2003 is an Act concerned with fiscal discipline.