In News: The Monthly Economic Review highlights two key areas of concern for the Indian economy: the fiscal deficit and the current account deficit (or CAD)
- As government revenues take a hit following cuts in excise duties on diesel and petrol, an upside risk to the budgeted level of gross fiscal deficit has emerged
- 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 more borrowing by the government in the market which leads to crowding out effect.
- At a time when the government is trying its best to kick-start and sustain a private sector investment cycle, borrowing more than what it budgeted will be counter-productive.
Current account deficit
The current account essentially refers to two specific sub-parts:
- Import and Export of goods — this is the “trade account”.
- Import and export of services — this is called the “invisibles account”.
- The net effect of a trade account and the invisibles account is a deficit, then it is called a current account deficit or CAD.
- A widening CAD tends to weaken the domestic currency because a CAD implies more dollars (or foreign currencies) are being demanded than rupees.
- Costlier imports such as crude oil and other commodities will not only widen the CAD but also put downward pressure on the rupee. A weaker rupee will, in turn, make future imports costlier.
- The report underscores the need to trim revenue expenditure.
- Rationalizing non-capex expenditure has thus become critical, not only for protecting growth supportive capex but also for avoiding fiscal slippages
- Capex or capital expenditure essentially refers to money spent towards creating productive assets such as roads, buildings, ports etc.
- Capex has a much bigger multiplier effect on the overall GDP growth than revenue expenditure.
Source: Indian Express
Previous Year Question
Q.1) With reference to the expenditure made by an organisation or a company, which of the following statements is/are correct? (2022)
- Acquiring new technology is capital expenditure.
- Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.
Select the correct answer using the code given below:
- 1 only
- 2 only
- Both 1 and 2
- Neither 1 nor 2