2011 GS Paper I, all questions

UPSC Prelims 2011 · GS Paper I

Question 10: Economy and Social Development

Consider the following actions which the Government can take :

  1. 1.Devaluing the domestic currency.
  2. 2.Reduction in the export subsidy.
  3. 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 ?

a1 and 2
b2 and 3
c3 only
d1 and 3

AnswerThe answer is (d).

The current account deficit narrows when exports rise or imports fall. Devaluing the rupee makes exports cheaper abroad and imports dearer at home, so the deficit shrinks. Cutting export subsidy raises export prices and weakens competitiveness, which widens the deficit. Attracting FDI and FII inflows brings foreign capital that finances the gap and supports the rupee, and this is usually counted as helping, though strictly such inflows finance the deficit rather than shrink it. Remember: devaluation helps; withdrawing export support hurts.

  • 1. Devaluation boosts exports and discourages imports.
  • 2. Less export subsidy makes exports costlier, so the deficit tends to widen.
  • 3. Capital inflows finance the gap and support the rupee, though strictly they fund the deficit rather than shrink it.

How you could have got this

  1. If you were sure statement 1 is correct, (b) and (c) go: each of them leaves 1 out.

    What you needed to know: Devaluation boosts exports and discourages imports.

  2. Then, if you were sure statement 2 is not correct, (a) goes: it includes 2.

    What you needed to know: Less export subsidy makes exports costlier, so the deficit tends to widen.

Only (d) is left. You didn’t need statement 3.

This follows an unofficial answer: UPSC has not published its key for this year, and if that answer is wrong, so is this path.

Which options go is worked out from UPSC’s key and the options, not by a model.

Why each option is right or wrong
  • (a) Statement 2 is wrong: cutting export subsidy hurts exports and widens the deficit.
  • (b) Includes the wrong statement 2 and omits devaluation.
  • (c) Misses devaluation, which makes exports cheaper and imports costlier.
  • (d) Right: devaluation and capital inflows help; cutting export subsidy does not.

Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2011, General Studies Paper I, Series A. The paper on upsc.gov.in.