Question 11 from UPSC CSE 2016 - Economy

Question

Which of the following best describes the term 'import cover', sometimes seen in the news?

IASCODEX · Accepted Answer

Correct Option: D. It is the number of months of imports that could be paid for by a country's international reserves

Strategy: Identify the core meaning of 'cover' in an economic context, which implies the ability to meet liabilities using available assets. 'Import cover' specifically refers to the capacity to finance imports. Evaluate options based on this understanding: Option A links imports to GDP, a different metric. Option B is merely the total import value. Option C describes a trade ratio. Option D directly relates imports to a country's *international reserves* and measures the *duration* (in months) for which these reserves can finance imports, aligning precisely with the concept of 'cover'.

Key Info: **Import Cover**
- Import cover refers to the number of months of future imports that a country's current foreign exchange reserves can finance.
- It is a key indicator of a country's external vulnerability and its ability to withstand external shocks, such as a sudden stop in capital inflows or a rise in import prices.
- A higher import cover generally indicates greater financial stability and confidence in the economy. Conversely, a low import cover can signal an impending balance of payments crisis or currency depreciation.
- The calculation involves dividing the total foreign exchange reserves by the average monthly import bill.

**Foreign Exchange Reserves (Forex Reserves)**
- These are assets held by a central bank or monetary authority, usually in reserve currencies (like the US Dollar, Euro, Yen, Pound Sterling), gold, Special Drawing Rights (SDRs) by the IMF, and a country's Reserve Tranche Position (RTP) with the IMF.
- They serve multiple purposes: backing domestic currency, maintaining exchange rate stability, financing imports, and managing external debt obligations.
- The Reserve Bank of India (RBI) is responsible for managing India's foreign exchange reserves.

**Related Economic Indicators**
- **Import Penetration (or Import Intensity):** This is the ratio of the value of imports to a country's Gross Domestic Product (GDP) or total domestic consumption, indicating the reliance of the economy on imported goods and services.
- **Trade Balance:** The difference between a country's exports and imports of goods and services over a period. A trade surplus occurs when exports exceed imports, and a trade deficit occurs when imports exceed exports.

IASCODEX · Answer

Option A: It is the ratio of value of imports to the Gross Domestic Product of a country

IASCODEX · Answer

Option B: It is the total value of imports of a country in a year

IASCODEX · Answer

Option C: It is the ratio between the value of exports and that of imports between two countries