RAS question
The 'Twin Deficit' problem in an economy refers to:
Correct answer: (B) Fiscal deficit and Current Account Deficit existing simultaneously.
The twin deficit problem refers to the simultaneous existence of a fiscal deficit and a current account deficit in an economy.
Explanation
The twin deficit hypothesis links a government's fiscal deficit with the economy's current account deficit. A fiscal deficit arises when government spending exceeds revenue; this can raise government borrowing, crowd out private investment, and increase imports. A current account deficit means the economy is importing more than it exports. The World Bank press release uses the term in exactly this sense: it says Burkina Faso's twin deficits were its fiscal and current account deficits, and then reports improvements in both. The phrase is not about any two fiscal indicators, but about the fiscal balance and the external current account appearing together as macroeconomic stress points.
Why the other options are wrong
- (A) Revenue deficit and primary deficit are both fiscal concepts, while the twin deficit problem pairs the fiscal deficit with the current account deficit.
- (C) NPAs of banks and corporate losses describe the twin balance sheet problem, not the twin deficit problem.
- (D) A trade deficit with a budget surplus is not a twin deficit, because the fiscal side is in surplus rather than deficit.
Concept
This tests macroeconomic balances, especially how fiscal policy and the external sector can move together. It recurs in RAS because budget deficits, current account pressure, imports, exports, and government borrowing are core Indian Economy themes.