At home, the post-pandemic normalization has spurred a renewed demand for imported inputs. But abroad it has had the opposite effect, leading to a decline in demand. Foreign households are no longer demanding so many goods now that the lockdowns and the fiscal stimuli that gave them money to spend have both ended.
So India's imports have soared just when its merchandise exports have started to fall. Foreign demand will slow further as advanced countries slip into what now seem like inevitable recessions.
India's Current Account Deficit could then widen to about four percent of GDP in 2022-23, double the level the Reserve Bank of India traditionally regards as safe. One possibility would be to attract foreign capital inflows worth at least four percent of GDP, but the world faces unprecedented uncertainty: a land war in Europe, the highest inflation in the developed world in four decades, the fastest pace of interest rate hikes in the history of the US Federal Reserve, an energy crisis in Europe, and a slowdown in China that continues to struggle with Covid-19. In such an uncertain environment, foreign investors prefer safe assets such as US government bonds rather than emerging markets like India.
Given below are two statements. In the light of the above statements, choose the correct answer from the options given below.
The answer is that Statement I is false but Statement II is true.
In an uncertain environment investors prefer safe assets such as US government bonds.
So they do not favour emerging markets like India, making Statement I false.
The passage says the deficit could widen even further in 2022-23.
So the deficit is likely to increase, making Statement II true.
Thus one statement is false and the other is true.
So the answer is that Statement I is false but Statement II is true.
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