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An article in GulfNews.com noted that in September 2012 the Indian government of Prime Minister Manmohan Singh made "urgently needed reforms to reduce the fiscal deficit and attract foreign investment to help the current account deficit and growth."

a. Could there be a connection between India's fiscal (budget) deficit and its current account deficit? Briefly explain.

b. How would attracting foreign investment help the current account deficit and (economic) growth?

c. The article further notes that the Reserve Bank of India (the central bank) stated that: "Financing the CAD (current account deficit) with increasingly risky and volatile flows increases the economy's vulnerability to sudden shifts in risk appetite and liquidity preference, potentially threatening macroeconomic and exchange rate stability." What does India's central bank mean by "risky and volatile flows" that finance their current account deficit? How could those flows threaten India's macroeconomic stability?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M91738446

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