Question 58 from UPSC CSE 2019 - Economics

Question

In the context of India, which of the following factors is/are contributors to reducing the risk of a currency crisis?
1. The foreign currency earnings of India's IT sector
2. Increasing the government expenditure
3. Remittances from Indians abroad
Select the correct answer using the code given below.

IASCODEX · Accepted Answer

Correct Option: B. 1 and 3 only

Strategy: Identify which factors directly increase foreign exchange inflows. Both IT sector's foreign currency earnings and remittances add to foreign exchange reserves, which help buffer against currency crises. Increased government expenditure, however, does not necessarily strengthen reserves or lower the crisis risk, as it may even lead to fiscal deficits and external imbalances. Thus, eliminate statement 2 and select statements 1 and 3 only.

Key Info: A currency crisis arises when a country is unable to defend the value of its currency, leading to rapid depreciation. This usually occurs if the country does not have sufficient foreign exchange reserves to meet external payment obligations or counter negative market sentiments.

Foreign currency earnings, such as those from India's IT sector, are vital as they directly add to the stock of foreign exchange reserves. India's IT exports, which bring in substantial US dollar inflows, help stabilize the current account and ensure availability of hard currency.

Remittances are the funds sent by Indians living and working abroad back to their families or for investment purposes. India is one of the largest recipients of remittances globally, and these inflows provide constant support to the balance of payments, helping to mitigate external account vulnerabilities.

Increasing government expenditure refers to higher government spending on goods, services, subsidies, or capital outlay. While it may boost domestic demand, it does not by itself increase foreign exchange reserves. In fact, if government expenditure leads to higher imports or larger fiscal deficits financed via external borrowing, it can increase vulnerability to currency crises.

Thus, only foreign earnings from sectors like IT and remittances abroad directly reduce the risk of a currency crisis for India by maintaining forex reserves; government expenditure's impact is indirect and not inherently stabilizing in this context.

IASCODEX · Answer

Option A: 1 only

IASCODEX · Answer

Option C: 2 only

IASCODEX · Answer

Option D: 1, 2, and 3

In the context of India, which of the following factors is/are 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.

In the context of India, which of the following factors is/are 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.