Twin deficits problem

Twin deficit refers to the fiscal and current account deficit.
Fiscal deficit connotes a higher expenditure over income of the government.
- The gap between expenditure and income is bridged through borrowing from the 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.
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 percent of GDP while Current Account Deficit for FY 22 was 1.2 percent.

Cause

Cuts in excise duties on diesel and petrol lead to increase in fiscal deficit.
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 of a cycle of wider deficits and a weaker currency.
At the same time, expenditure is up mainly on account of higher fertilizer 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 prices of not just crude oil but also edible oil and other commodities will push up the import bill, which means there will be a higher payout in dollars.
Also, higher fiscal deficit is also expected to fuel the current account deficit.

Impact the Indian economy

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

Steps to be taken

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.
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 on time.
In order to lower the import bill, boosting domestic production of goods and services under the Production Linked Incentives (PLI) schemes is vital.