Topic: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
5. Capital flows and current account deficit (CAD) are related as capital flows can help finance a country’s current account deficit. However, excessive reliance on capital flows to finance a current account deficit can also be risky. Evaluate. (250 words)
Difficulty level: Tough
Reference: Indian Express
Why the question:
As per the RBI’s quarterly statistics, the current account deficit (CAD) widened to 4.4 per cent of GDP in the second quarter of 2022-23, down from 2.2 per cent in the preceding quarter.
Key Demand of the question:
To write about the relations between CAD and capital inflows and risks associated with it.
Directive word:
Evaluate – When you are asked to evaluate, you have to pass a sound judgement about the truth of the given statement in the question or the topic based on evidence. You must appraise the worth of the statement in question. There is scope for forming an opinion here.
Structure of the answer:
Introduction:
Begin by defining CAD.
Body:
First, write about the various components of capital inflows – foreign direct investment (FDI) and portfolio investment.
Next, write about the relation between CAD and capital inflows – capital flows can help finance a country’s current account deficit as well as bringing in new investment and creating jobs in the country.
Next, mention the risks associated with capital flows – f investors lose confidence in the country’s economy, they may withdraw their investments, leading to a sudden outflow of capital and a currency crisis.
Conclusion:
Conclude by writing a balanced opinion
