Receding Twin Deficit
Lower Twin Deficit is bringing good news for the economy by way of control on inflation, lesser domestic and foreign debt and better value for domestic currency. It adds one more reason to celebrate as these numbers mean better prospects for the economy. — Dr. Ashwani Mahajan
Fiscal deficit and deficit in balance of payment on current account are the two deficits which had been haunting Indian economy for long. In economics, we call them Twin Deficit. If we see data, we find a significant decline in both, in the first eight months of the current fiscal year. Though, this is too short a period to make a definitive conclusion, but there doesn’t seem to be any major reason, for twin deficit to rise again in any big way, in months to come. As per the latest data, deficit in balance of payment on current account (CAD) has come down to nearly one percent of GDP in first two quarters of the current fiscal year (2023-24), while fiscal deficit has been recorded at nearly 50 percent of the total fiscal deficit estimated for the whole year, in the first eight months from April to November 2023. Actual fiscal deficit for these eight months has been estimated to be only rupees 9.06 lakh crores against total fiscal deficit projected for the whole year, that is, rupees 17.86 lakh crores. This implies that if the same trajectory follows, total fiscal deficit for full year (2023-24), would be rupees 13.5 lakh crores, which would be nearly 75.4 percent of the projected fiscal deficit. If we allow for fiscal deficit to exceed the current projections, by rupees one lakh crores, fiscal deficit could be nearly 81 percent of the budgeted figure.
It is notable that in the budget projections, fiscal deficit for the year 2023-24 was estimated to be 5.9 percent of GDP, but with lower fiscal deficit figures, it is expected to be only 4.8 percent of GDP. Therefore, by any imagination, fiscal deficit cannot breach budget projections, rather it may definitely be lower than the budgeted fiscal deficit.
Twin Deficit: Duet of Fiscal Deficit and CAD
Fiscal deficit is the difference between the total revenue and total expenditure of the government in a fiscal year. Fiscal deficit arises when the expenditure (revenue expenditure and capital expenditure) of the government is more than the revenue generated by the government in that year. Though, fiscal deficit and increase in public debt are two different concepts, primary effect of fiscal deficit is felt on public debt. It’s notable that in the first eight months of the current fiscal year, total increase in debt has been 8.1 lakh crores.
Current Account Deficit (CAD) in the balance of payments, occurs when the total value of goods and services imported by a country exceeds the total value of goods and services it exports. Its implication is on outflow of foreign exchange from the country on current account. This deficit is filled mainly by borrowing from abroad or inflow of foreign investment, both foreign direct investment and foreign portfolio investment. Direct impact of CAD is on the demand for foreign exchange, which leads to the depreciation of domestic currency and increased dependence on foreign borrowings and foreign investment.
We understand that fiscal deficit, could be kept in check due to booming revenue receipts. Both direct and indirect taxes have shown a significant increase, even higher than the budget projections. For instance average monthly GST receipts in the first eight months of the current fiscal year have been rupees 1.66 lakh crores, which is nearly 11 percent higher than average GST receipts of rupees 1.5 lakh crores, in the corresponding period last year and are also higher than the projected numbers in the budget 2023-24. Similarly receipts from Corporate Tax in the first eight months, have shown a much bigger receipts, of 5.14 lakh crores, showing an increase of 20 percent from receipts in 2022-23. Similarly receipts of personal income tax of rupees 5.67 lakh crores, too are 29 percent, higher than the receipts a year ago. Despite lower receipts from excise duty due to lowering of windfall tax rate on crude oil, overall tax receipts show a growth of 14.7 percent, which is higher than 10.9 percent growth factored in the budget. Government expenditure in these eight months also is not less than projected, rather it’s marginally higher than what was factored in the budget.
Better Services Exports
On the other hand, we see booming export of services, helping India to limit CAD to nearly one percent of GDP. Significantly, CAD was 3.8 percent of GDP, in the last quarter of the financial year 2022-23. It’s notable that India’s export of services have been growing at a much faster rate in the last few years. In 2020-21 export of services were hardly US$ 206 billion, which increased to US$ 254.5 billion In the year 2021-22, and to US$ 325.3 billion, in 2012-23. Services exports have been estimated at US$ 254 billion in first eight months of the current financial year. If they (services export) maintain present pace, it may reach nearly US$ 380 billion in the year 2023-24. It is notable that merchandise exports are not increasing, rather they show a decline by 6 percent compared to same period last year, and stand at US$ 279 billion in the first eight months of current financial year. However, total imports of merchandise and services stand at US$ 562.2 billion in the first eight months of 2023-24. As merchandise and services exports are estimated to be US$ 533.4 billion, current account deficit in the balance of payment is only US$ 28.8 billion for the first eight months of the financial year 2023-24. If we make projections of CAD based on first eight months, total CAD for the whole year would be US$ 43.2 billion (Rs 3.6 lakh crores) which would be 1.19 percent of the projected GDP of Rs 301.75 lakh crores for first eight months of the current financial year.
Good news for the economy
Lower than projected fiscal deficit means double benefit for the economy.
First, we shall be able to manage inflation in a better way. We understand that due to purchase of Russian oil, cheaper than global price of crude, thanks to independent foreign policy on the one hand and control on food prices, have helped India to keep inflation rate lower than other large economies. Now, lower than projected fiscal deficit too is destined to help government to keep price line within limits.
Secondly, as we understand, fiscal deficit is majorly filled by government’s borrowings, lower fiscal deficit means lower than projected central government’s debt. Notably, budget 2023-24 had given central government’s debt projections at Rs 169.5 lakh crores, which may be at least lower by 3 lakh crores. It’s important to note that if this lower fiscal deficit materialises, central government’s debt would be 55 percent of GDP, as compared to 56 percent of GDP in 2022-23.
Lower CAD is no less boon for the economy. In the past, our country had been experiencing much high level of CAD, sometimes going upto nearly 5 percent of GDP. Though, in the last few years this has remained around 2 percent of GDP, CAD of around 1 percent of GDP is therefore no less an achievement. Higher CAD increases our dependence on foreign borrowings and foreign investment, which puts pressure on rupee, and leads to its depreciation. But lower CAD will make rupee stronger, which means control on imported inflation and lower foreign outgo on interest on foreign loans, apart from many other benefits.
In conclusion we can say that lower Twin Deficit is bringing good news for the economy by way of control on inflation, lesser domestic and foreign debt and better value for domestic currency. It adds one more reason to celebrate as these numbers mean better prospects for the economy.