Balance of payments current account deficit and state budget deficit. These are two concomitant phenomena of the salubrious energy commodities that India imports from abroad, which also lead to rising prices of domestic resources.
India cuts taxes
In an effort to mitigate the effects of the salubrious energies on the population, India’s finance ministry has stepped in to reduce taxes contained in energy and fuel prices. But this gave up a non-negligible amount of revenue to the state budget. The government’s finances are thus falling into an increasing imbalance, which, indeed, has been openly acknowledged by the Department for the first time.
Double deficit problem
At the same time, rising prices for energy commodities lead to an increase in the monetary volume of imports, causing the current account of India’s balance of payments to grow deficit. India thus faces a double deficit problem, but hardly within the government’s power to address.
As such, India’s finance ministry warned that the growing current account deficit would eventually result in a weakening of the rupee, which will also help bring India’s economy back into external balance. The weaker rupee will dampen imports and spur exports, while the trade deficit will begin to shrink over time.