India’s emerging twin deficit problem

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)

Fiscal deficit

• 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)

1. Acquiring new technology is capital expenditure.
2. Debt financing is considered capital expenditure, while equity financing is considered revenue expenditure.

Select the correct answer using the code given below:

1. 1 only
2. 2 only
3. Both 1 and 2
4. Neither 1 nor 2