Consider the following actions which the Government can take: 1. Devaluing the domestic currency. 2. Reduction in the export subsidy. 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?

The correct answer is D because of the following reasons:

Action 1: Devaluing the domestic currency makes domestic goods cheaper for foreigners and imports more expensive for locals. This encourages exports and discourages imports, which directly helps in reducing the trade deficit and, consequently, the current account deficit.

Action 2: Reducing export subsidies makes domestic goods more expensive in the international market. This typically leads to a decrease in exports, which would likely increase the current account deficit rather than reduce it.

Action 3: Attracting greater FDI and FII funds increases the inflow of foreign currency. While these are recorded in the capital account, the policies used to attract them often improve the overall balance of payments and can help finance or indirectly reduce the pressures on the current account by boosting domestic production and export capacity.

Therefore, actions 1 and 3 are effective measures for addressing a current account deficit.