With the economy slowing down, the rupee experiencing a free fall and stock market charts going up and down in a frenzy, here’s a reader’s guide on some factors impacting our growth which is currently crawling at 4.4 percent:

1)      What is fiscal deficit?

A fiscal deficit arises when the government’s expenditure overshoots the revenue it earns from various sources including taxes, fees, interest, penalties, etc. Thus, when the government fails in its role of management of its accounts, where it spends beyond what its pockets allow, a fiscal deficit is set to arise.

For some time now, India has been grappling with the issue of fiscal deficit. This is because India is a developing country which requires huge investments to constantly be made in terms of infrastructure development, capacity building, etc and these activities generate returns only in the long-term. However, owing to policy paralysis and slowdown in the global economy following the 2008 crisis, most of our projects have not even started functioning thus widening the deficit gap which stands at 4.9 percent.

2)      What does current account deficit mean?

A country experiences a current account deficit (CAD) when it imports more goods than it exports thus leading to surplus outflow of funds. Dealing with a major difference between import and export figures could make a country highly dependent on borrowings. At present, India owes its external lenders, debt worth $ 390 billion till March this year up from $ 345.5 billion. India’s current account deficit (CAD) at 4.9 percent of the gross domestic product (GDP) is the third highest in the world and the highest among the developing economies, according to a Morgan Stanley report.

3)      How can the government finance fiscal and current account deficits?

Whenever the government is faced by a fiscal and/or current account deficit situation, it will have to resort to deficit financing which would involve borrowing or printing more money. This needs to be done by striking the right balance because too much of borrowing by selling government bonds would push interest rates up leading to investors pulling their funds out of the market. This in turn could send the stock market crashing. On the other hand, if too much money is circulated in the economy with the demand for goods remaining stagnant, it could lead to increased inflation as more money in the economy will be chasing the same amount of goods.

4)      What is inflation? How can it be managed?

Inflation can be described as the rate at which the general level of prices for goods and services rises thus bringing down the purchasing power of individuals/institutions. Keeping a check on inflation is the responsibility of the central bank. India has always witnessed high inflation. Until the early 1990s, inflation figures remained in double-digits and India had to deal with a balance of payments crisis during that time.

It was following this crisis that inflation control has become a priority for the government and our institutions. However, since January, the rupee has depreciated by 20 percent against the dollar, touching an all time low of over 68 to a dollar, and this has raised concerns over inflationary pressures.

Inflation can be managed by cutting down the circulation of money in the economy which can be done by hiking interest rates. The government could also impose higher taxes which would leave individuals with lower disposable incomes.

5)      What has been the impact of fiscal deficit, current account deficit and inflation on the Indian economy?

High deficit and inflationary pressures are the factors responsible for pulling down the growth of the country which is presently at 4.4 percent. The devaluation in the rupee is a result of the existence of these factors as investors are continuously pulling out their funds from the market. This has raised serious doubts on the growth story of the Indian economy. The government and its institutions have swung into action in order to bring the economy back on the growth track. These include—hiking duty on import of gold and silver to check the outflow of foreign exchange, making overseas borrowing norms easy to fetch an additional $11 billion this fiscal to bring down its CAD. Also, investment norms have been made flexible.