TWIN DEFICIT PROBLEM

 The much discussed twin deficit problem in recent times is a combination of fiscal and current account deficits together faced by a  country. Fiscal deficit is a condition where government's revenue is in short of government expenditure and the gap is met through market borrowings and other  measures. Current Account Deficit refers to the situation where the country's current account balance of payment is in deficit. Current Account records the value of exports and imports of both  goods and services and  international transfers  of payment.It is one of  the components of balance of payment other than capital account. It is the financial transactions between the resident and  non resident entities for the accounting period of one year.If monetary flows out of a country for imports Investments and services exceeds the money receipts to the country through exports investments and services it leads to Current Account deficit. Much referred Twin deficit and the taper tantrum episode of 2013 reminds us the vulnerabilty of external shocks when US Federal Reserves slowed down bond purchases  which triggered a wave of capital flight from emerging economies particularly from South Africa, Brazil, India, Indonesia and Turkey which were termed as the 'fragile five' due to their high current account deficit and hugei, dependence on inflow of capital. 

According to Union Budget for the fiscal year 2022-23 India's fiscal deficit is projected to be 6.4% and Current account deficit 1.2% of GDP respectively. Unfortunately prevailing geopolitical, economic and global supply chain disruptions are leading to widening of current account and fiscal deficits in the country.  Finance ministry's Monthly economic Review observed that the recent exice duty cuts  on petrol and diesel between March 21 and may 22 have adversely affected government revenues.On the contrary increased fertilizer and food subsidies provided by the Government involved an additional  expenditure of rupees 39 lakh crores widening the fiscal deficit further. Increased crude oil prices along with import of edible oils and other commodities leads to heavy import bill mostly in US dollars. This in turn increased current account deficit and weakening the value of the rupee further aggravating external disequilibrium.High fiscal deficit leads to a  reduction in the availability of resources for investment and also increases interest rates which in turn adversely impact both private investment and government expenditure of the country. This will lead to  decline in economic activity and growth. Government will have to take measures to cut revenue expenditure and increase capital expenditure to check fiscal deficit. Monthly economic Review also  indicated that rationalising non capital expenditure is critical  not only for protection of growth supportive capital expenditure but for avoiding fiscal slippage too.

On the other hand an increase in current account deficit leads to the weakening of rupee in terms of major currencies particularly the  US dollar which further affects the import bill.So far the rupee has depreciated by 3.93%between March and June compared to higher  levels of depreciation in Argentina 10.2%.Brazil 10.9%.china 5.3%andTurkey 13.3 %Higher import bill leads to large payments in dollars and decrease in foreign exchange reserves. Government has to formulate revised strategies to boost exports, ease down export procedures and relax tax dues.Eventhough the 2008-09 financial crisis originated from real estate sector in the USA had not affected much our economy we focused on reviving growth at a cost of macroeconomic stability and a coordinated monetary and fiscal policy with fiscal stimulus in the form of tax cuts and increased expenditure to boost consumer demand were undertaken.  Reserve Bank of India introduced rate cuts to increase liquidity and ease credit in order to boost investment. The  rate cut cycle continued till March 2010.Fiscal spending coupled with low interest rates resulted in higher inflation and imports. The policy that focused on enhancing growth in turn resulted in the neglect of  macro economic stability. 

The trade deficit has been increasing and in June 2022 it has reached $25.6 billion and CAD is expected to cross 3% of GDP in this fiscal year. Based on the available BOP data for 2022-23 showed  that exports has shown 15.2% of GDP as against 13.2% in 2021-22 , imports  22.7% of GDP in 2022-23 as against 19.2%in 2021-22, oil imports 6.8% of GDP in 2022-23 as against 5% in 2021-22, trade deficit 7.5% in 2022-23 as against 5.9% in 2021-22 .The current account deficit is estimated to be 3.2 percent of GDP for the year 2022-23 which is not at all  sustainable. In the capital account particularly by foreign portfolio investors there was a pullout of over 1lakh crores of Indian equity investment In the first quarter of current financial year itself due to monetary policy tightening by global central banks, rising inflation,better yields in the US market and emerging geo political tensions induced by war..In the week ending July 1st 2022 foreign exchange reserves reduced to $588.314 billion from $593.323 billion on June 24th 2022.The strengthening of US dollar and the consistent weakening of the rupee  had reflected in the proactive steps tapken by Reserve Bank of India to augment domestic dollar supplies which include 1.Domestic banks have been incentivised to source more NRI deposits by relaxing the additional reserves for incremental deposits four months. In addition the existing interest rate restrictions on FCNR(B) and NRE deposits have  also  been waived until October 31.The strategy is to achieve FCNR (B) deposits mobilisation of  over $26 billion brought during taper tantrum episode of 2013.The framework for Foreign Portfolio investors to invest in domestic bonds has been relaxed till October 31 and the range of G securities offered under the fully automated route also increased FPI s are now allowed to hold more than 30% of their portfolio in bonds with less than 1 year maturity. 

It may be noted here that a the crisis  faced in the external front is largely due to depriciating rupee, sharp increase in current account deficit and a large reduction in the capital account surplus due to foreign portfolio investment outflows.We require urgent measures to enhance exports and export competitiveness policies should be taken against fuelling of external debt. NRI remittances and investment must be further incentivised.With regard to increase in fiscal deficit we should further rationalise revenue expenditure and try to maintain quality capital expenditure.While resorting to asset monetization program it should not result in indiscriminate distressed sale of valuable public assets.