Explained: India’s emerging twin deficit problem

What is the News?

The Finance Ministry in its report has warned of a Twin Deficit Problem due to higher commodity prices and a rising subsidy burden.

What is a Twin Deficit?

A twin deficit basically refers to a situation where the country runs relatively large current account and fiscal deficits. 

A higher twin deficit is inherently destabilizing and was the primary reason why India faced a currency crisis back in 1991.

What is Fiscal Deficit?

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Report on India’s Fiscal Deficit

The Government revenues have taken a hit following cuts in excise duties on diesel and petrol. Due to this, upside risk to the budgeted level of gross fiscal deficit has emerged.

Hence, the government needs to trim its revenue expenditure (or the money the government spends just to meet its daily needs) to protect its growth-supporting Capital Expenditure(Capex) and also for avoiding fiscal slippages.

What is the Current Account Deficit?

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Report on Current Account Deficit

The ​​costlier imports such as crude oil and other commodities will not only widen the Current Account Deficit(CAD) but also put downward pressure on the rupee. A weaker rupee will, in turn, make future imports costlier. 

Further, there is one more reason why the rupee may weaken. If, 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.

Source: The post is based on the article “Explained: India’s emerging twin deficit problempublished in Indian Express on 22nd June 2022.

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