UPSC Prelims PYQ 2019: Factors Reducing Risk of a Currency Crisis in...
In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?
- The foreign currency earnings of India’s IT sector
- Increasing the government expenditure
- Remittances from Indians abroad
Select the correct answer using the code given below:
- 1 only
- 1 and 3 only
- 2 only
- 1, 2 and 3
Explanation
Statement 1 is correct
- The IT sector in India is a major contributor to foreign exchange reserves through the export of services. These earnings help maintain a healthy balance of payments (BOP) and improve foreign exchange reserves, thereby reducing the risk of a currency crisis by stabilising the rupee against foreign currencies.
Image Source: BS (India Inc’s Forex Earnings by Sectors (Rs trillion))
Statement 2 is incorrect
- While this may boost domestic demand and economic growth, it does not contribute to foreign exchange reserves. Instead, if funded by borrowing, it could widen the fiscal deficit and lead to inflationary pressures, potentially increasing the risk of a currency crisis. Hence, it is not a contributor to reducing such risks.
Statement 3 is correct
- Remittances from the Indian diaspora are a significant source of foreign currency inflow. These remittances strengthen the country’s foreign reserves and reduce dependency on external borrowing, further safeguarding against currency crises.
Answer: (b) 1 and 3 only; Difficulty Level: Easy
