UPSC Prelims 2016 Q18: Indian Economy – External Sector & Balance Of Payments
- (a) It is the ratio of value of imports to the Gross Domestic Product of a country
- (b) It is the total value of imports of a country in a year
- (c) It is the ratio between the value of exports and that of imports between two countries
- (d) It is the number of months of imports that could be paid for by a country's international reserves
Answer: (d) It is the number of months of imports that could be paid for by a country's international reserves
Explanation
Import cover
Import cover tells how many months of imports a country can pay for with its foreign exchange reserves.
Formula: reserves divided by average monthly imports.
Reserves of 360 billion dollars and imports of 40 billion dollars a month give 9 months of cover.
The options checked:
| Option | What it actually describes |
|---|---|
| (a) Ratio of value of imports to Gross Domestic Product | Import intensity of the economy |
| (b) Total value of imports of a country in a year | Annual import bill |
| (c) Ratio between the value of exports and that of imports between two countries | A trade ratio |
| (d) Number of months of imports that could be paid for by a country's international reserves | Import cover |
In the 1991 crisis, India's import cover fell to about three weeks.
A cover of three months is the usual minimum for safety.
Answer: (d) number of months of imports payable from international reserves.
Why each option is right or wrong
- (a) Incorrect. The ratio of imports to GDP shows import dependence, not import cover.
- (b) Incorrect. The total value of imports in a year is just the import bill.
- (c) Incorrect. A ratio of exports to imports between two countries is a trade measure.
- (d) CORRECT. Import cover is the number of months of imports that reserves can pay for.
Key point
Import cover = foreign exchange reserves divided by monthly imports; three months is the safe minimum; India had about three weeks in 1991.
Remember
Import cover = months of imports paid by reserves.
Common mistakes
- Confusing import cover with the trade balance.
- Measuring it in rupees or dollars; it is measured in months.
- Forgetting the 1991 benchmark of barely three weeks of cover.
Exam tip
'Cover' means how long the reserves will last. The answer is always in months.
Sources
- Reserve Bank of India — Half Yearly Report on Management of Foreign Exchange Reserves
- NCERT Class XII — Introductory Macroeconomics, Ch 6 (Open Economy Macroeconomics)