The twin deficit problem is not new to India. Whenever we had adverse forex flows, very high crude prices, falling exports or strong imports of non-essentials, our trade deficit would widen. When growth slowed, revenues fell, Government expenditure went out of control, tax buoyancy tax collections weakened, subsidies soared, and the fiscal deficit became a serious worry.

Whenever the twin deficit problem reared its head, India inevitably faced a forex crisis, high inflation and slowing growth. So avoiding the twin deficit problem is one of the most important objectives of any Government. Excepting in extraordinary circumstances as we saw during the 2020 COVID crisis, our Government needs to consciously work towards avoiding a twin deficit.

The current situation is forcing the Government to take multiple measures to avoid or minimise the adverse impact of a twin deficit. This means that the Government will undertake mid-term course corrections in levying export taxes, customs duties on imports, and restrictions on exports. What we’re seeing now is this trend playing out. The intent is to make the Rupee’s depreciation gradual, to stabilize forex flows, keep domestic inflation under control, bring down commodity prices and ensure that interest rates don’t rise out of control. This exercise to rein in the twin deficit is likely to be a challenging and ongoing one.

We cannot afford to lower our guard. We need to remain constantly vigilant. Our response to every challenge must be swift and decisive. If we manage the twin deficit well, India’s return to economic growth will be swifter than the rest of the world. Successful damage control is the key to a smart, sustained economic recovery.

Recent Posts

Expectation Setting

Posted on April 7, 2024

Fixed Income Outlook – April 2024

Posted on April 2, 2024