UPSC CSE Prelims
Question 59
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 FIIs.
Which of the above action/actions can help in reducing the current account deficit ?
View correct answer and explanation
Correct answer: D
Correct Option: D
Explanation: A currency depreciation can improve export competitiveness and reduce imports over time, while attracting foreign investment can finance a current-account shortfall; lowering export subsidy works against exports.
Statement / Item-wise Analysis:
1: Correct - Potentially correct: depreciation may improve trade balance after adjustment, subject to demand elasticities.
2: Incorrect - Incorrect: reducing export subsidy could hurt export competitiveness, widening rather than lowering the deficit.
3: Correct - Qualified: FDI/FII inflows finance the balance-of-payments gap but do not mechanically reduce the current-account deficit itself.
Option-wise Analysis:
A: Incorrect - includes unsupported item 2; omits supported item 3.
B: Incorrect - includes unsupported item 2; omits supported item 1.
C: Incorrect - omits supported item 1.
D: Correct - includes the supported statements and excludes the unsupported ones.
Review Note: Source option D treats capital-account investment inflows as reducing the current-account deficit. Strict balance-of-payments accounting distinguishes financing the CAD from reducing it; check this answer key/wording.