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16th July 2022 (6 Topics)

Twin Deficit Problem

Context:

The finance ministry has raised the concerned of macro-economic risks in the recovery phase, due to liquidity tightening measures by US Federal Reserves.

What is Twin Deficit Problem?

  • Twin Deficit Problem: The situation of high fiscal deficit along with current account deficit is termed as twin deficit problem.
  • The situation of high fiscal deficit arises, when the expenditure of the government is much higher than the revenue collection.
  • When the import volume of the nation dominates over the export volume at a higher degree, resulting into a disruption in balance of payment termed as current account deficit.

Why this problem has arisen?

  • Rising deficit: Increased subsidy schemes, leading to rise in government expenditure clubbed with reduction in tax rate resulting into fall in tax collection, widened the deficit of the government.
  • Out flow of currency: Outflow of foreign currency major because of two reasons. One, the foreign investors are pulling out investments from Indian market, second, rise in oil prices in the international market increased the import bills.
  • Skewed trade balance: The trade balance is the net export of a nation in terms of goods, which remains negative for India since liberalization.
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