Twin Deficit Problem:
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).
- It’s also the first time the government has explicitly talked about the possibility of fiscal slippage in the current fiscal year.
- 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).
- 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.