Twin Deficit Problem
- 23 Jun 2022
- 5 min read
Why in News?
The finance ministry in its ‘Monthly Economic Review’ cautioned the re-emergence of the twin deficit problem in the economy, with higher commodity prices and rising subsidy burden leading to an increase in both fiscal deficit and Current Account Deficit (CAD).
- It’s also the first time the government has explicitly talked about the possibility of fiscal slippage in the current fiscal year.
What are the Major Highlights of the Report?
- The World is looking at a distinct possibility of widespread stagflation.
- India, however, is at low risk of stagflation, owing to its prudent stabilization policies.
- Meanwhile, Indian financial markets have witnessed hefty foreign investment outflows the past eight months. A weak GDP growth outlook has exacerbated the situation.
- In a black swan event comprising a combination of shocks, there is a 5% chance of outflows under portfolio investments of 7.7 %of GDP and short-term trade credit retrenchment of 3.9 %of Gross Domestic Product (GDP).
What will be the he Impact of Twin Deficit Problem?
- The twin deficit problem, especially the worsening current account deficit, may compound the effect of costlier imports, and weaken the value of the rupee thereby further aggravating external imbalances.
- Trim revenue expenditure (or the money government spends just to meet its daily needs).
- Promoting domestic manufacturing and decrease in imports of unessential items.
- Prudent Fiscal Policy: The government should rationalise both the capital and revenue expenditure and should go for a balance budget to avoid a fiscal slippage.
- Fiscal Deficit: It is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year.
- Current Account Deficit (CAD): The current account measures the flow of goods, services, and investments into and out of the country. It represents a country’s foreign transactions and, like the capital account, is a component of a country’s Balance of Payments (BOP).
- Twin Deficit Problem: Current Account Deficit and Fiscal Deficit (also known as "budget deficit" is a situation when a nation's expenditure exceeds its revenues) are together known as twin deficits and both often reinforce each other, i.e., a high fiscal deficit leads to higher CAD and vice versa.
- Stagflation: It is described as a situation in the economy where the growth rate slows down, the level of unemployment remains steadily high and yet the inflation or price level remains high at the same time.
- Black Swan Event: It can be characterised by a combination of all adverse shocks experienced in the history coming together, leading to a perfect storm.