UPSC Prelims 2019 Q65: Indian Economy – External Sector & Balance Of Payments
- (a) 1 only
- (b) 1 and 3 only
- (c) 2 only
- (d) 1, 2 and 3
Answer: (b) 1 and 3 only
Explanation
Factors Reducing Currency Crisis Risk in India
| Statement | Claim | Verdict | Detail |
|---|---|---|---|
| 1 | IT sector's forex earnings | TRUE | India's IT/BPO exports bring in ~US$150+ billion/year in foreign exchange - a major buffer against currency crisis. |
| 2 | Increasing government expenditure | FALSE | Higher govt spending expands fiscal deficit, may weaken currency (crowding out, inflation) - does NOT reduce currency crisis risk. |
| 3 | Remittances from Indians abroad | TRUE | India is the world's largest recipient of remittances (~US$100+ billion/year from Gulf, USA, UK) - major forex inflow, reduces currency crisis risk. |
Statements 1 and 3 are correct. Answer: (b) 1 and 3 only.
Answer: (b) 1 and 3 only.
Why each option is right or wrong
- (a) Incorrect. Remittances (statement 3) are also a key contributor.
- (b) CORRECT. IT exports and remittances bring foreign exchange to India, strengthening forex reserves and reducing currency crisis risk. Government expenditure does the opposite.
- (c) Incorrect. Government expenditure does not reduce currency risk - it may worsen fiscal deficit.
- (d) Incorrect. Statement 2 is wrong.
Key point
Reduce currency crisis risk: IT exports + remittances + FDI + tourism (forex earners). Increase risk: fiscal deficit, oil imports, capital outflows.
Remember
Statements 1 and 3 are correct. IT sector's foreign currency earnings and remittances from Indians abroad both bring foreign exchange into India, strengthening forex reserves and reducing the risk of a currency crisis. Increasing government expenditure does not reduce currency risk - it may worsen the fiscal deficit and the rupee.
Common mistakes
- Assuming any economic activity strengthens the rupee - only forex-earning ones do.
- Confusing govt expenditure (fiscal policy) with monetary/exchange rate stability - they are different.
- Not knowing remittances have been India's most stable forex source (larger than FDI in most years).
Exam tip
Currency crisis drivers: Twin deficits (fiscal + CAD), oil price shock, capital flight, external debt shocks. Buffers: IT exports, remittances, FDI, foreign portfolio inflows, forex reserves (~US$650+ billion), swap lines.
Sources
- RBI - Balance of Payments Annual Report
- World Bank - Migration and Development Brief (remittance data)