UGC NET Economy Q48

Question

Read the paragraph given below and answer the question.
At home the post-pandemic normalisation has spurred a renewed demand for imported inputs. But abroad, it has had the opposite effect, leading to a decline in demand. Foreign house holds are no longer demanding so many goods now that the lockdowns that kept them in their houses and the fiscal stimuli that gave them the money to spend have both ended. So, India's imports have soared just at a time when its merchandise exports have started to fall.
Foreign demand will slow further as advanced countries slip into what now seem like inevitable recessions,. In that case, India's Current Account Deficit (CAD) could widen even further, possibly to four percent of GDP in 2022-23 - double the level that the Reserve Bank of India (RBI) traditionally regards as "safe". How should India respond?
One possibility would be to attract foreign capital inflows worth at least four percent of GDP. But is this realistic? The world is currently facing unprecedented levels of uncertainty. After two years of the pandemic, we are witnessing a land war in Europe, the highest inflation in the developed world in the last four decades, the fastest pace of interest rate hikes in the history of the US Federal Reserve, an energy crisis in Europe, and slowdown in China that continues to struggle with Covid-19.
In such an uncertain environment, foreign investors prefer to invest in safe assets such as US government bonds rather than emerging markets like India.

Accepted Answer

A