SYLLABUS SECTION: GS III (ECONOMY)

WHY IN THE NEWS?

Recently, the finance ministry has cautioned the re-emergence of India facing a twin deficit problem Due to higher commodity prices in the economy, and rising subsidy burden leading to an increase in both fiscal deficit and current account deficit.

• It’s also the first time the government has explicitly talked about the possibility of fiscal slippage in the current fiscal year.

TWIN DEFICIT:

A twin deficit refers to a nation’s current account deficit and a simultaneous fiscal deficit.

Twin deficits aren’t necessarily harmful.

SPILLOVER EFFECTS OF FISCAL DEFICIT:

1. Revenues take a hit following cuts in excise duties on diesel and petrol,
2. An upside risk to the budgeted level of gross fiscal deficit has emerged.

• A fiscal deficit may cause the current account deficit to widen, compounding the effects of costlier imports,
• And weakening the value of the rupee, thereby further aggravating external imbalances,
• Creating the risk (admittedly low, at this time) of a cycle of wider deficits and a weaker currency.

SILVER LINING FOR INDIA:

• India is at low risk of stagflation, owing to its prudent stabilization policies.
• Stagflation is a situation in which the inflation rate is high, the economic growth rate is slow, and unemployment remains steadily high.

WAY FORWARD:

• Rationalizing non-Capex expenditure. It will help in avoiding fiscal slippages.
• Keeping the fiscal deficit within the budgetary target | INDIA FACING TWIN DEFICIT PROBLEM DUE TO COMMODITY PRICES SUBSIDY.
• Tightening fiscal and monetary policies.
• Import substitution/cuts, especially fossil fuels and non-essential goods.
• Ensuring a gradual evolution of the exchange rate in line with underlying external fundamentals.

FISCAL DEFICIT: ·         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.   CURRENT ACCOUNT DEFICIT   ·         The current account essentially refers to two specific sub-parts: Ø  Import and Export of goods — this is the “trade account”. Ø  Import and export of services — this is calls the “Invisibles account”. a)     Trade Account Deficit: If a country imports more goods (everything from cars to phones to machinery to food grains etc) than it exports, it is said to have a trade account deficit. b)     Invisible Account Deficit: If a country is earning a surplus on the invisible account — that is, it could be exporting more services than importing. ·         The net effect of a trade account and the Invisibles account is a deficit, then it is called a current account deficit or CAD. Ø  A widening CAD tends to weaken the domestic currency because a CAD implies more dollars (or foreign currencies) are being demanded than rupees.

 

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