Twin Deficits is a combination of two related economic problems, the current account deficit and the fiscal deficit.
Current Account Deficit occurs when a country’s total imports of goods, services and transfer is greater than the country’s total export of goods, services and transfers.
Fiscal Deficit occurs when a government’s total expenditures exceed the revenue that it generates (excluding money from borrowings).Fiscal Deficit of the country increases because of higher subsidies on different goods and services which are also used for commercial purpose, Example is diesel; different plans of the government for the poor where intermediary gets more benefits than poor people; hole in the policy made by the government; lesser tax collection due to theft of tax by bigger fishes etc.
These two deficits do not harm the economy up to a certain level but higher deficits create a lot of problems.
Disadvantage of Higher Current Account Deficit
- It decreases the growth of the country.
- It puts pressure on the currency of the country and value of currency starts to decline.
- Companies with foreign debt burden suffer a lot as their debt burden increased.
- Inflation takes a hike.
- Investors’ confidence decreased in the economy.
- It also increases the exchange rate volatility.
Disadvantage of Higher Fiscal Deficit