Current Affairs

UPSC TWIN DEFICIT PROBLEM - English

TWIN DEFICIT PROBLEM

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).

About

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).

Impact

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.

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