India's “DIRE” risks: Is the twin deficit the biggest threat for India?

Amongst the myriad of economic issues that ail India currently, four risks that can pose immediate threat to India's growth momentum are: the DIRE risks [DIRE refers to an acronym of Deficits (Current account deficit and Fiscal Deficit), Inflation, Recession and the weakening Exchange rate.] In recent times, the widening fiscal deficit in India is gaining alarming proportions and compounded by the widening current account deficit, giving credence to the twin deficit hypothesis. This paper seeks to establish whether the twin deficits pose a serious threat to India's growth. In order to prove the same data on inflation, fiscal deficit, current account deficit and GDP growth rate in India for the period 1988 to 2011 was utilized. Applying correlation techniques, it was found that the twin deficit hypothesis in India exists. Both fiscal deficit and current account deficit have a negative relation to GDP growth rate. Fiscal deficit also has a positive relation to inflation. With the current account deficit uncontrollable in the short run, it is the fiscal deficit that needs to be controlled to break the vicious cycle of twin deficit and its impact on inflation.