Consider the following actions which the Government can take:
- Devaluing the domestic currency.
- Reduction in the export subsidy.
- Adopting suitable policies which attract greater FDI and more funds from FIls.
Which, of the above action/actions can help in reducing the current account deficit?
[UPSC Civil Services Exam – 2011 Prelims]
(a) 1 and 2
(b) 2 and 3
(c) 3 only
(d) 1 and 3
Answer: (d)
Explanation:
- Dealing with a Current Account Deficit (CAD) requires addressing various factors, including the exchange rate, consumer spending, capital inflow, inflation, and interest rates.
- In the case of India, the high CAD is primarily influenced by significant imports of crude oil and gold. To reduce the Current Account Deficit, it is important to focus on increasing exports and controlling non-essential imports such as gold, mobiles, and electronics. Therefore, statement 3 is correct.
- Additionally, implementing measures like currency hedging and facilitating easier regulations for manufacturing entities to raise foreign funds can contribute to managing CAD effectively.
- The government and Reserve Bank of India (RBI) may also consider reviewing debt investment limits for Foreign Portfolio Investors (FPIs), along with exploring other potential measures to address the Current Account Deficit.
- Current account deficit (CAD): It is a measurement of a country’s trade where the value of the goods and services it imports exceeds the value of the products it exports.
