gs1medium
Consider the following actions which the Government can take:
- 1.Devaluing the domestic currency.
- 2.Reduction in the export subsidy.
- 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?
- A.1 and 2
- B.2 and 3
- C.3 only
- D.1 and 3
▶ Answer & Explanation
Correct answer: D. 1 and 3
Devaluing the domestic currency makes exports cheaper for foreigners and imports more expensive for domestic residents, thus improving the trade balance and reducing the current account deficit. Policies to attract Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) inflows increase the capital account surplus, which can offset the current account deficit. Reducing export subsidies, while seemingly beneficial, would make exports less competitive, potentially worsening the trade balance.
Source: UPSC gs1 2011