Read the Tea Leaves – Maintaining the Indian economy’s Macroeconomic Stability | 15th November 2022 | UPSC Daily Editorial Analysis

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What's the article about?

  • It talks about the steps that needed to be taken to maintain the Indian economy's macroeconomic stability in the face of growing uncertainty about the global economy's future.

Relevance:

  • GS3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment; Effects of Liberalization on the Economy;
  • Prelims

What's the crux of the article?

  • The world economy is slowing down due to various issues such as COVID-19-induced disruptions, the Russia-Ukraine War, climate change, etc.
  • As a result, central banks in developed economies have been aggressively tightening their economies.
  • In such a context, a realistic assessment of the state of the economy is crucial for maintaining the macroeconomic stability of the Indian economy.

Analysis:

  • The revised expectations suggest that the economy is likely to grow slower than what has been expected so far = around 6.5 per cent (earlier it was expected to grow at 7.2 per cent).
  • Inflation will continue to remain above the central bank’s target.
  • Despite the fact that both food and fertiliser subsidies are much higher than budgeted, the fiscal deficit is projected to be 6.5% of GDP.
  • Government tax collection is doing great.
  • Current Account Deficit will likely rise due to the elevated crude oil prices.

Twin Deficit:

  • The twin deficit is a combination of fiscal and current account deficit.
  • The Fiscal deficit refers to a condition where a governments’ expenditure exceeds the revenue it is getting.
    • Such gaps between the expenditure and revenue are compensated by the market through loans, etc.
  • The current account deficit is a condition where the current account balance of a payments of a country is not equivalent.
    • Current account deficit depicts that the money going out of a country for the imports, investments, and services is greater than money coming into the country through the exports, investments and services provided by us.
    • It is measured in million USD as a percentage of GDP.
  • According to the Union Budget the fiscal and Current Account Deficit for Financial Year 2022-23 was at 6.4 and 1.2 per cent of the GDP respectively.

 

Way Forward:

  • Given the likelihood that these risks will not subside in the near term, the policy framework should be focused toward preserving macroeconomic stability. However, doing so requires first a realistic assessment of the state of the economy.



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