Twin Deficit

For the past 2 years, India has been fighting slow growth, high inflation and the twin deficits – fiscal deficit and current account deficit. The current account deficit reached the peak of 5.3% of GDP in Q1 FY13 which is much beyond the comfort zone of 3%. The fiscal deficit has also proved difficult to control, leading to a large part of borrowing going into servicing the debt rather than towards capital intensive activities.
Off late the threat of being relegated to the status of junk bonds has made the government to swing into action and try and take steps to curb the deficits. It is the result of these measures that the fiscal deficit is not expected to go much beyond the government target of 5.3% of GDP. As a part of its efforts, government has also come up with the target of reducing the fiscal deficit to 3% of GDP by 2016-17. In order to rein in on the fiscal deficit, under the direction of Finance Minister, government managed to cut expenditures to the tune of Rs.80000 crores. Besides this, unlike previous years government has managed to keep its stake selling program on track, which is expected to result in the revenue receipts of about Rs.30000 crores. However, the government has also been cutting corners and using financial jugglery to cuts the deficit. Transferring the subsidy payment bills onto the next year and one time receipts from stake sale in PSUs are not effective and long term solution. Apart from this, losses like those of State Electricity Boards, which may not get reflected on the fiscal deficit, but have to be written off by a public sector banks are also a matter of concern. Diesel decontrolling is a step in right direction, however raising the cap on number of LPG cylinders raises questions about government’s commitment to reducing fiscal deficit. Populist measures like The Food Security Act would also put further pressure on government finances. Another step being taken by the government to reduce fiscal deficit is an expected hike of about only 6% for planned development expenditure at the cost of providing subsidies for National Food Security Program. This may help control fiscal deficit in short term, but affects the growth of economy in long term.
Compared to relative success in controlling fiscal deficit, government has failed miserably on CAD front. Despite increasing the import duty on gold the imports have remained constantly high. Also, there has been no concrete decision taken about introducing Exchange Traded Funds for gold. India has failed to control import of items like vegetable oil, for which 60% of demand would be met through imports compared to 55% last year. Besides lack of clarity on how to manage wheat reserves has led to inability to fully exploit the opportunity of wheat exports. Another area where government needs to take action in order to check CAD is related to coal imports which jumped from around $10 billion in 2011 to $17 billion in 2012 due to regulatory and environmental hurdles.
Thus, overall government needs to take further measures in order to reduce the twin deficits.