Volume IconWhere is India's economy headed after FinMin's twin deficit warning?

The FinMin on Monday struck a note of caution about the re-emergence of the twin deficit problem. Where is the Indian economy headed? Is there trouble ahead? Find out what an RBI paper warns about

ImageBhaswar Kumar New Delhi
economy


The World Bank recently cut its FY23 real GDP growth forecast for India to 7.5 per cent from 8 per cent, which is slightly more bullish than the Reserve Bank of India’s forecast of 7.2 per cent. S&P and the IMF have also recently cut their FY23 forecast for India.  

Amid these signs of slowing growth, further shocks could be in store. The finance ministry has warned of a twin deficit problem, with higher commodity prices and rising subsidy burden leading to an increase in both the fiscal and current account deficits.

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According to the ministry’s latest Monthly Economic Review, an increase in the fiscal deficit might cause the current account deficit to widen and weaken the value of the rupee. This could further aggravate external imbalances, creating the risk, which is admittedly low, at this time, of a cycle of wider deficits and a weaker currency.

But, at the same time, the report also said that even as the world was looking at a distinct possibility of widespread stagflation, India was at low risk due to its stabilisation policies.

Meanwhile, Indian financial markets have witnessed hefty foreign investment outflows the past eight months. A weak GDP growth outlook has exacerbated the situation. However, a paper co-authored by Reserve Bank of India’s deputy governor Michael Debabrata Patra says that there is only a five per cent chance of portfolio outflows of up to 3.2 percent of GDP in a year in response to a Covid-type contraction in growth.
 
In a black swan event comprising a combination of shocks, there is a 5 percent chance of outflows under portfolio investments of 7.7 per cent of GDP and short-term trade credit retrenchment of 3.9 percent of GDP.

Create the graphic of a torn scrap of paper with the following text in it: “A black swan event could be characterised by a combination of all adverse shocks experienced in Indian history coming together, leading to a perfect storm.”

The warning about a twin deficit begs the question -- Will the government have to prioritise macroeconomic stability over near-term growth going ahead?

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First Published: Jun 22 2022 | 7:00 AM IST

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