Which of the following will be the implication(s) of drastic fall in oil prices in world market over Indian economy?

  1. Surplus in capital account
  2. Deficit in current account
  3. Deflation

Select the correct option from the codes given below:

Answer: [C] Only 3

First statement is incorrect because the main components of the capital account include foreign investment, loans and banking capital. Foreign investment comprises of Foreign Direct Investment (FDI) and Foreign Portfolio Investment or Institutional investment. But due to global fall in oil prices, oil producing economies are slashing budgets, thus, lower investment as FII and FDI in India and other economy from gulf and major oil producing countries. Second statement is incorrect because recent reports have a say that, India, which imports 80 percent of its oil requirement, has already made a windfall gain of about Rs 3 lakh crore in import bills due to falling global oil prices. Hence, Import bill has fallen drastically, improving the current account balance of the country. Deflation is a monetary phenomenon, that is, it is affected by the demand and supply of money. Third statement is correct because deflation is a situation just opposite of inflation, it occurs when prices fall for a long enough period of time. At present many countries including India are at high risk of deflation due to falling oil prices.

This question is a part of GKToday's Integrated IAS General Studies Module