Mains Answer Writing - 10 Mar, 2026

GS3

Economy

15 marks

“Persistent Current Account Deficit (CAD) is not necessarily harmful for a developing economy like India, but its sustainability depends on the nature of capital inflows.”
Examine this statement in the context of India’s external sector.

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Tips for your answer

1. Start with Conceptual Clarity: Briefly explain Current Account Deficit within the framework of Balance of Payments and state why developing economies like India may run a CAD (high imports for growth, capital goods, energy needs).
2. Differentiate Types of Capital Inflows
Explain the difference between stable and volatile inflows:
- Long-term investments like Foreign Direct Investment (more stable)
- Short-term flows like Foreign Portfolio Investment (more volatile)
- Link this to the sustainability of CAD.
3. Conclude with Policy Perspective: Mention how institutions like the Reserve Bank of India maintain stability through forex reserves, exchange rate management, and policies to boost exports and reduce excessive import dependence.

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