India facing twin deficit problem

Posted By
10Pointer
Categories
Economy
Published
22nd Jun, 2022

Context

The finance ministry 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.

Given the uncertainties, the report highlights two key areas of concern for the Indian economy:
- fiscal deficit
- current account deficit(or CAD)

What is twin deficit?

Twin deficit identity is used to refer to a nation's current account deficits and a simultaneous fiscal deficit.

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.
- Higher levels of fiscal deficit typically imply the government eats into the pool of investible funds in the market which could have been used by the private sector for its own investment needs.
Current Account Deficit (CAD): CAD is the shortfall between the money received by selling products to other countries and the money spent to buy goods and services from other nations.

What is affecting the economy?

The economic growth outlook is likely to be affected by several factors owing to the

trade disruptions
export bans
the resulting surge in global commodity prices

All the factors are likely to continue to stoke inflation — as long as the Russia-Ukraine conflict persists and global supply chains remain unrepaired.