Consider the following action which the Government can take:
- Devaluing the domestic currency.
- Reduction in export subsidy.
- Adopting suitable policies which attract greater FDI and more funds from FIIs.
Which of the following actions/actions can help in reducing the Current Account Deficit?
- 1 and 2 only
- 2 and 3 only
- 3 only
- 1 and 3 only
Explanation
Only actions 1 and 3 are correct
- The Current Account Deficit (CAD) occurs when a country’s imports exceed exports, leading to more outflow of foreign exchange than inflow. The government can take various steps to reduce CAD:
- Devaluing the domestic currency (Helps reduce CAD)
- A weaker domestic currency makes exports cheaper and imports costlier, boosting exports and reducing imports.
- This helps in narrowing the trade deficit, a key component of CAD.
- Reduction in export subsidy (Does NOT help reduce CAD)
- Export subsidies make domestic goods more competitive in international markets, boosting exports.
- Reducing subsidies could discourage exports, which might worsen the CAD rather than improving it.
- Attracting greater FDI and FII inflows (Helps reduce CAD)
- Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) bring in foreign exchange, increasing foreign reserves.
- This helps finance the CAD, thereby reducing its negative impact.
