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?

To address a Current Account Deficit (CAD), the government can employ several strategies. Devaluing the domestic currency (1) makes exports cheaper and imports more expensive for foreigners, which typically improves the trade balance and current account, provided the Marshall-Lerner condition is met. Adopting policies to attract greater FDI and FII (3) increases capital inflows, which helps finance the CAD and can strengthen the overall Balance of Payments [2]. While FDI is a long-term investment in productivity, FII increases capital availability in secondary markets [1]. Conversely, reducing export subsidies (2) would likely decrease the competitiveness of domestic goods abroad, potentially worsening the trade deficit rather than reducing it. Therefore, actions 1 and 3 are effective measures for managing external imbalances, while action 2 is counterproductive in the context of reducing a deficit.

Sources

1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 16: Balance of Payments > b. Depository Receipt > p. 478
2. [2] Geography of India ,Majid Husain, (McGrawHill 9th ed.) > Chapter 12: Transport, Communications and Trade > BALANCE OF TRADE AND BALANCE OF PAYMENT > p. 52