Question 65
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.
AOptions
BSolution
A currency crisis typically occurs when a country's currency experiences a sharp and sudden devaluation, often triggered by a large current account deficit, depletion of foreign exchange reserves, or loss of investor confidence. Factors that contribute to reducing this risk are those that strengthen a country's foreign exchange position or improve its current account balance.
1. The foreign currency earnings of India's IT sector: This is a significant contributor. India's IT and IT-enabled services sector is a major earner of foreign exchange through exports. These earnings directly boost the country's foreign exchange reserves and help offset import bills, thereby improving the current account balance and strengthening the rupee against external shocks.
2. Increasing the government expenditure: This is generally not a contributor to reducing currency crisis risk; in fact, it can be detrimental. Increased government expenditure, especially if financed by borrowing or leading to higher fiscal deficits, can lead to macroeconomic imbalances such as higher inflation, increased demand for imports (worsening the current account), and potentially capital flight, all of which increase the risk of a currency crisis.
3. Remittances from Indians abroad: This is a major contributor. Remittances from non-resident Indians (NRIs) are a substantial and consistent source of foreign currency inflow into India. These inflows directly augment foreign exchange reserves and significantly improve the current account balance, thereby acting as a cushion against external vulnerabilities and reducing the risk of a currency crisis.
Thus, statements 1 and 3 are correct.
CStrategy
For questions on macroeconomic stability, link economic factors to their impact on key indicators like foreign exchange reserves, current account deficit, and inflation. Understand how various sectors (e.g., IT, remittances) contribute to external balances and how government policies (e.g., expenditure) can affect these balances.
DSyllabus Analysis
This question falls under the Indian Economy section of the UPSC Prelims syllabus, specifically focusing on macroeconomics, external sector, and currency stability.
EQuestion Analysis
Medium. The question requires an understanding of macroeconomic linkages and how various factors influence a country's vulnerability to a currency crisis.