gs1medium

Consider the following actions which the Government can take:

  1. 1.Devaluing the domestic currency.
  2. 2.Reduction in the export subsidy.
  3. 3.Adopting suitable policies which attract greater FDI and more funds from FIIs. Which of the above action/actions can help in reducing the current account deficit?
  1. A.1 and 2
  2. B.2 and 3
  3. C.3 only
  4. D.1 and 3
▶ Answer & Explanation

Correct answer: D. 1 and 3

Devaluing the domestic currency makes exports cheaper for foreign buyers and imports more expensive for domestic consumers, thereby improving the trade balance component of the current account. Attracting greater FDI and FIIs increases capital inflows, which can offset current account deficits, thus helping to manage or reduce it. A reduction in export subsidy would make exports less competitive, potentially worsening the trade balance.

Source: UPSC gs1 2011

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