UPSC Prelims 2002 Q133: Indian Economy – External Sector & Balance Of Payments
A country is said to be in debt trap if
- (a) it has to abide by the conditionalities imposed by the International Monetary Fund
- (b) it has to borrow to make interest payments on outstanding loans
- (c) it has been refused loans or aid by creditors abroad
- (d) the World Bank charges a very high rate of interest on outstanding as well as new loans
Answer: (b) it has to borrow to make interest payments on outstanding loans
Explanation
Meaning of a debt trap
| Option | Assessment |
|---|---|
| Borrowing to make interest payments on outstanding loans | Yes — the country borrows more only to service old debt |
| Bound by IMF conditionalities | A condition of loans, not the trap itself |
| Refused loans or aid by creditors | A credit squeeze, not a debt trap |
| World Bank charges high interest | A cost of borrowing, not the trap itself |
A country is in a debt trap when it has to borrow in order to pay the interest on its existing loans, so debt keeps growing on itself without funding new productive use.
Answer: (b) it has to borrow to make interest payments on outstanding loans.
Why each option is right or wrong
- (a) Incorrect. IMF conditionalities are terms of lending, not a debt trap.
- (b) CORRECT. Borrowing to pay interest is the debt trap.
- (c) Incorrect. Refusal of loans is a credit squeeze.
- (d) Incorrect. A high rate of interest alone does not define the trap.
Key point
Debt trap: debt service exceeds new borrowing capacity; borrowing rises just to repay interest.
Remember
Debt trap = borrowing to pay interest on past debt.
Common mistakes
- Choosing IMF conditionalities, which are policy conditions.
- Thinking a refusal of aid is the same as a trap.
- Mixing the trap with a balance of payments crisis.
Exam tip
The trap is a loop: new loans pay old interest.
Sources
- Ramesh Singh — Indian Economy
- Economic Survey 2001-02 — external debt