BL Explainer: Twin deficits

Shishir Sinha | Updated on: Jul 04, 2022
The are worrying signs over the fiscal and current account deficit trends

The are worrying signs over the fiscal and current account deficit trends | Photo Credit: Kameleon007

What is the twin deficit challenge that the government is talking about?

Twin deficit refers to the fiscal and current account deficit. Fiscal deficit means higher expenditure over income. The gap between expenditure and income is bridged through borrowing from market.

The term current account deficit is derived from current account balance. According to the OECD, the current account balance of payments is a record of a country's international transactions with the rest of the world. The current account includes all the transactions (other than those in financial items) that involve economic values and takes place between resident and non-resident entities. Also covered are offsets to current economic values provided or acquired without a quid pro quo. This indicator is measured in million USD and percentage of GDP. The Cambridge Dictionary defines current account deficit signifies that the money going out of a country through imports, investment, and services is greater than money coming into the country

The Union Budget for FY 2022-23 estimates fiscal deficit at 6.4 per cent of GDP while Current Account Deficit for FY 22 was 1.2 per cent.

What is causing thee deficits?

The Finance Ministry’s Monthly Economic Review, said: “as government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged. Increase in the fiscal deficit may cause the current account deficit to widen, compounding the effect of costlier imports, and weaken 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.”

Excise duty on petrol and diesel has been lowered twice between November last year and May this year. Since this is one of major source of revenue not just for Centre but for States also, a reduction in the tax rate will affect government revenues. At the same time, expenditure is up mainly on account of higher fertiliser subsidy and outgo for food subsidy. All these are expected to push expenditure beyond ₹39 lakh crore, (as projected in the Budget). Since the revenue will take a hit, the fiscal deficit is set to widen.

For the current account deficit, rising price of not just crude but also of edible oil and other commodities will push up the import bill, which means there will be a higher pay out in dollars. Also, higher fiscal deficit is also expected to fuel the current account deficit.

How will it impact the Indian economy?

A higher fiscal deficit is expected to lower the resources available for private investment. This could lead to higher interest rate which in turn will affect private investment and finally growth. A higher current account deficit will lead to the weakening of rupee which will further impact the import bill. Though exports will get the benefit of a weaker rupee, but with the rise of costly imported inputs, the benefit could be tempered.

What should the government do to tackle this?

To keep the fiscal deficit under control, the government needs to cut expenditure. Since capital expenditure should not be cut considering the growth requirement, a cut in revenue expenditure is advisable. In fact, the Monthly Economic Review has also said that rationalizing non-capex expenditure has become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages.

The government has a limited role in tackling the surging current account deficit. Still, it can formulate a new strategy to boost exports by exploring newer markets, ease the procedures for exporters and release their tax dues in time. In order the lower the import bill, boosting domestic production of goods and services under the Production Linked Incentives (PLI) schemes is vital.

Has the government taken any steps so far in this regard?

As of now, the government has not formally come out with any plan or initiated any step.

Published on June 26, 2022
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