India’s Emerging Twin Deficit Problem

In News

• Recently, the Ministry of Finance in its latest Monthly Economic Review cautioned the re-emergence of the twin deficit problem in the Indian economy. 

About Twin Deficit

• Twin deficit identity is used to refer to a nation’s current account deficits and a simultaneous fiscal deficit.
  • A fiscal deficit is a budget shortfall. The fiscal deficit is essentially the amount of money that the government has to borrow in any year to fill the gap between its expenditures and revenues.
  • A current account deficit means a country is sending more money overseas for goods and services than it is receiving.
• The current account essentially refers to two specific sub-parts:
  • Import and Export of goods is the “trade account”.
  • Import and export of services is called the “invisibles account”.
• The term became widely used in the 1980s until the 1990s because the United States experienced the “twin” deficits during this time-frame.

Issues/ Challenges

• The economic growth outlook is likely to be affected by several factors owing to the trade disruptions, export bans and the resulting surge in global commodity prices all of which will continue to stoke inflation.
• Government revenues take a hit following cuts in excise duties on diesel and petrol.
• Lack of funds: Higher levels of fiscal deficit typically imply the government eats into the pool of investible funds in the market which could have been used by the private sector for its own investment needs.
• Counter-productive: At a time when the government is trying its best to kick-start and sustain a private sector investment cycle, borrowing more than what it budgeted will be counter-productive.
• Costlier imports such as crude oil and other commodities will not only widen the CAD but also put downward pressure on the rupee.
  • A weaker rupee will in turn make future imports costlier.
• Foreign portfolio investors (FPI): in response to higher interest rates in the western economies especially the US, foreign portfolio investors (FPI) continue to pull out money from the Indian markets that too will hurt the rupee and further increase CAD.
• Higher commodity prices and rising subsidy burden is leading to an increase in both fiscal deficit and current account deficit.
  • India’s fertiliser subsidy bill for FY23 could rise to around Rs 2.5 trillion against the Budget Estimate of Rs 1.05 trillion because of a global supply shortage amid the war in Ukraine.

Way forward/ Suggestions

• Accomodative fiscal stances of MPC helps investors to make robust investment. 
• Maintaining the stock of essential commodities to balance the demand and supply situation. 
  • Ex: India’s Ban on wheat export to tame demand/supply situation. 
• Revenue expenditure: There is a need to trim revenue expenditure or the money the government spends just to meet its daily needs.
• Rationalising non-capital expenditure has become critical not only for protecting growth supportive capital but also for avoiding fiscal slippages.
  • Capital expenditure essentially refers to money spent towards creating productive assets such as roads, buildings, ports etc.
• The World is looking at a distinct possibility of widespread stagflation: India however is at low risk of stagflation, owing to its prudent stabilisation policies.
• India continued to be the quickest growing economy among major countries in 2022-23.

Source: IE