DMPQ: Why twin deficit is a concern for any economy? Outline the methods adopted by Government of India to deal with twin deficit.

The fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing. Current account deficit is when country’s export of goods, services and transfers are lesser than its imports of goods, services and transfers.

 

Impacts of Fiscal deficit:

If unchecked it will lead to crowding out effect, manipulation of capital structures and interest rates, decrease net exports, and lead to higher taxes, higher inflation or both.

 

Impacts of Current account deficit:

If unchecked it will lead to Weakening of Indian rupee in global market, drying up of forex reserves and depletion of foreign assets which will decrease attractiveness of Indian markets to foreign investors.

 

Measures to bridge-in FD:

 

• Taxes:

1. GST, Changes in custom duty
2. Reduction in direct tax rate for corporate entities to increase the tax base.
3. Safe harbour rules: accept the transfer pricing declared by taxpayer without any investigation under defined circumstances.
4. Simplification of ITR

• Public sector undertaking

1. Dis investment: Privatisation of non-performing PSU to reduce burden on tax payers.
2. Capital restructuring

• Expenditure management:

1. Rationalizing fertilizer subsidies.
2. Removing petroleum subsidies
3. DBT to check leakage

 

Measures to bridge in FD:

• Export growth:
• Make in India
• Import substitution
• Export oriented units
• Software technology park scheme

 

• Currency
• Cheap credit availability to export oriented business through duty exemption and remission schemes.
• Forex reserve- Deprecating value of currency to boast export.

 

• Import substitution:
• Local content: Mandatory local content requirement rules.
• Local manufacturing: Electronic Manufacturing clusters to reduce dependence on import of electronic and enhance production in local.

 

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