"In 2018, September government of India hikes custom duty on many luxury items", for:

Question

Accepted Answer

The correct option is 4:

The government's decision to hike customs duty on imported luxury items in September 2018 was a multi-pronged policy measure aimed at addressing several interconnected macroeconomic concerns, making "All of these" the correct answer. The primary challenge India faced at that time was a widening Current Account Deficit (CAD). By increasing customs duties on non-essential, high-value imported goods (luxury items), the government directly discouraged their importation. This reduction in imports helped to narrow the trade deficit component of the CAD. Furthermore, when luxury items are imported, Indian consumers pay in foreign currency (typically US Dollars), leading to an outflow of dollars. By reducing the volume of these imports, the policy directly helped in "controlling the outflow of dollar." The dollar outflow puts downward pressure on the Indian Rupee, causing it to depreciate. Since a reduction in dollar outflow (or increase in dollar inflow) helps to stabilize the exchange rate, this measure was also inherently aimed at "controlling the depreciation of the rupee." Thus, all three options represent valid and interrelated economic objectives of the custom duty hike.

The incorrect option is 1: controlling the CAD

While controlling the CAD was a major goal, it was not the sole objective. The CAD is impacted by several factors, and while reducing imports helps the CAD, the measure also had direct consequences on the currency and dollar flow, which are separate aspects of the overall problem.

The incorrect option is 2: controlling the depreciation of rupee

Controlling the depreciation of the rupee is a critical outcome of stabilizing the dollar outflow. However, the mechanism used—reducing imports through duty hikes—is a direct tool for managing the dollar outflow and CAD, meaning this choice alone is incomplete.

The incorrect option is 3: controlling outflow of dollar

Controlling the dollar outflow is the immediate effect of reducing high-value imports, as less foreign currency is needed for transactions. Yet, this monetary action is ultimately implemented to achieve the larger goal of managing the CAD and stabilizing the currency, thus making it one part of the total explanation, not the whole answer.