Twin Deficit Problem in India

June 23, 2022

Ministry of Finance recently released its ‘Monthly Economic Review’ report. In the report, Ministry has highlighted that, Fiscal Deficit and Current Account Deficit (CAD) are two key areas of concern for the Indian economy.

Findings of the report

Monthly Economic Review report noted that, Fiscal deficit has increased, possibly due to cuts in excise duties on petrol and diesel.
Oil prices have surged due to ongoing Russia-Ukraine crisis. It has led to deterioration in current account deficit because of higher oil import bill.
As per report, India will continue to be the fastest growing economy in 2022-23, among major countries.
India, unlike other countries, is at low risk of Stagflation because of its prudent stabilization policies.
Rupee can weaken if foreign portfolio investors (FPI) continue to pull out money from Indian markets, considering the higher interest rates in western economies especially the US. It will hurt rupee and further increase CAD.

Effect of Twin Deficit

Twin deficit will have no effect in short term; however, it may reduce the savings in long term. It might lead to depreciation in the rupee and imbalance in financial investments of government for social purposes.

Way forward

Government should cut its revenue expenditure.
Capital expenditure should be rationalized, in order to avoid fiscal slippages.
Tight monetary policy should be used, to achieve fiscal consolidation
Import of non-essential goods should be cut and exports of Indian goods should be made competitive.

What is Fiscal Deficit?

The shortfall in a government’s income, as compared to its spending, is called the fiscal deficit. It is amount of money, that is borrowed by government to fill the gap between its revenues and expenditures in any financial year. If the fiscal deficit is high, it means, government takes the investible funds in market for itself, which otherwise could have been used by private sector for investment needs.

What is Current Account Deficit?

When the total value of goods and services imported by a country becomes higher than total value of goods and services it exports, it is called as Current Account Deficit (CAD). Widening CAD is responsible for weakening to domestic currency, because CAD means more foreign currencies or dollars are in demand as compared to domestic currency (or rupees).