Foreign Exchange, FDI and External Debt (External Sector) Part-I

Total Questions: 50

31. If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India? [I.A.S. (Pre) 2020]

1. Not depending on short-term foreign borrowings.

2. Opening up to more foreign banks.

3. Maintaining full capital account convertibility.

Select the correct answer using the code given below:

Correct Answer: (a) 1 only
Solution:The short-term foreign borrowings have to be returned at a shorter time period. This makes an economy vulnerable if the economy is already facing financial crisis as it has an obligation to return the debt as well as interest payments. Hence, policy given in statement I is correct. Opening up to more foreign banks increase India's exposure to foreign money and may in fact aggravate financial crisis.

Hence, action given in statement 2 is incorrect. Capital account convertibility means that the currency of a country can be converted into foreign exchange/currency without any control and restrictions. Any deterioration in fiscal condition, balance of payments or any global financial crisis may cause a cessation or reversal of capital flows. This might make the economy vulnerable. Hence, action given in statement 3 is incorrect.

32. In the context of India, which of the following factors is/ are contributor/contributors to reducing the risk of a currency crisis? [I.A.S. (Pre) 2019]

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.

Correct Answer: (b) 1 and 3 only
Solution:A currency crisis is a situation in which serious doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed (currency) exchange rate. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis which is relative to the declining value of the home currency.

The foreign currency earnings of India's IT sector and remittances from Indians abroad together can reduce the risk of a currency crisis in India by greater inflow of foreign currency. While increase in government expenditure may increase the supply of rupee currency and increase imports which can adversely affect the currency crisis. Therefore, option (b) is the right answer.

33. Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee? [I.A.S. (Pre) 2019]

Correct Answer: (d) Following an expansionary monetary policy
Solution:Curbing imports of non-essential goods and promoting exports, encouraging Indian borrowers to issue rupee denominated Masala Bonds, and easing conditions relating to external commercial borrowing will lead to increase in inflow of dollars and bridge the deficit of Forex in India, preventing the slide of Indian rupee.

On the other hand, following an expansionary monetary policy will increase the supply of rupee currency without corresponding increase in the supply of dollars. It will also lead to lower interest rates and thus flight of foreign capital from India. Thus, dollar will strengthen and Indian rupee will weaken further.

Also, an expansionary monetary policy may fuel inflation and higher imports through higher government spending and further cause slide of rupee. Hence, option (d) is the correct answer.

34. Which one of the following measures is not likely to aid in improving India's Balance of Payment position? [B.P.S.C. (Pre) 2016]

Correct Answer: (d) Levying of higher duties on exports
Solution:Promotion of Import Substitution Policy, devaluation of rupee and imposition of higher tariff on imports will be helpful in improving India's Balance of Payment position while levying of higher duties on exports will reduce the volume of exports and thus not likely to aid in improving India's Balance of Payment position.

Disequilibrium of Balance of Payments (BOP)

  • If we add the current account and the capital account excluding the central bank's reserve account imbalances (Disequilibrium) is possible, for example, more imports than exports(and hence demand of foreign currency exceeds its supply) or vice-versa.
  • This deficit or surplus needs to be counterbalanced from the Foreign Reserve of the country in order to make net zero Balance of Payments.
  • Hence, a Balance of Payments (excluding forex) surplus (or deficit) is accompanied by an accumulation (or de-accumulation) of foreign exchange reserves.

35. Consider the following actions which the Government can take: [I.A.S. (Pre) 2011]

1. Devaluing the domestic currency.

2. Reduction in the export subsidy.

3. Adopting suitable policies which attract greater FDI and more funds from FIIs.

Which of the above action/actions can help in reducing the current account deficit?

Correct Answer: (d) 1 and 3
Solution:Curent account deficit is the exces of total imports of goods, services and transfer payments over total exports of goods, services and transfer payments.

Devaluation of the domestic currency can assist to increase exports and decrease imports (because for this foreign goods and services become expensive and domestic goods and services become cheaper), so that it can help in reducing the current account deficit Second, reduction in the export subsidy will reduce exports and so it is not required.

Third action i.e. adopting suitable policies which attract greater FDI and more funds from FIIs, although it is a component of capital account still it will help in reducing the current account deficit in long term. Hence, option (d) will be the correct answer.

36. In the last one decade, which one among the following sectors has attracted the highest Foreign Direct Investment inflows into India? [U.P.P.C.S. (Main) 2006, U.P.P.C.S. (Pre) 2006*]

Correct Answer: (b) Services sector
Solution:As per the question period, option (d) was the correct answer. While in the present context, services sector has attracted the highest Foreign Direct Investment (FDI) inflows into India in the last two decades. During April 2000 to March 2024, Foreign Direct Investment attracting top five sectors (in terms of US$) are as follows:

Services Sector (16.13%), Computer Software and Hardware (15.16%), Trading (6.39%), Telecommunications (5.79%) and Automobile Industry (5.34%). Total FDI inflow into India 2023-24 (April-March) is estimated at US $ 44423 million.

Sectors attracting highest FDI equity inflows during 2023-24 (April-March) are as follows: 1. Computer Software and Hard- ware (US $ 7973 million), 2. Services Sector (US $ 6640 mil- lion), 3. Construction (Infrastructure) Activities (US $ 6232 million), 4. Trading (US$ 3865 million), 5. Power (USS 1701 million).

37. Which sector in India attracts the highest FDI equity flow? [B.P.S.C. (Pre) 2017]

Correct Answer: (d) Service Sector
Solution:As per the question period, option (d) was the correct answer. For the latest data,  While in the present context, services sector has attracted the highest Foreign Direct Investment (FDI) inflows into India in the last two decades. During April 2000 to March 2024, Foreign Direct Investment attracting top five sectors (in terms of US$) are as follows:

Services Sector (16.13%), Computer Software and Hardware (15.16%), Trading (6.39%), Telecommunications (5.79%) and Automobile Industry (5.34%). Total FDI inflow into India 2023-24 (April-March) is estimated at US $ 44423 million.

Sectors attracting highest FDI equity inflows during 2023-24 (April-March) are as follows: 1. Computer Software and Hard- ware (US $ 7973 million), 2. Services Sector (US $ 6640 mil- lion), 3. Construction (Infrastructure) Activities (US $ 6232 million), 4. Trading (US$ 3865 million), 5. Power (USS 1701 million).

38. Which sector in India attracts the highest FDI equity flow? [Uttarakhand P.C.S (Pre) 2016]

Correct Answer: (c) Service sector
Solution:As per the question period, option (c) was the correct answer. While in the present context, services sector has attracted the highest Foreign Direct Investment (FDI) inflows into India in the last two decades. During April 2000 to March 2024, Foreign Direct Investment attracting top five sectors (in terms of US$) are as follows:

Services Sector (16.13%), Computer Software and Hardware (15.16%), Trading (6.39%), Telecommunications (5.79%) and Automobile Industry (5.34%). Total FDI inflow into India 2023-24 (April-March) is estimated at US $ 44423 million.

Sectors attracting highest FDI equity inflows during 2023-24 (April-March) are as follows: 1. Computer Software and Hard- ware (US $ 7973 million), 2. Services Sector (US $ 6640 mil- lion), 3. Construction (Infrastructure) Activities (US $ 6232 million), 4. Trading (US$ 3865 million), 5. Power (USS 1701 million).

39. The Largest inflow of foreign direct investment in India in 2007-08 took place in which sector? [U.P.P.C.S. (Spl.) (Mains) 2008]

Correct Answer: (b) Services
Solution:As per the question period option (b) was the correct answer. For the latest data, While in the present context, services sector has attracted the highest Foreign Direct Investment (FDI) inflows into India in the last two decades. During April 2000 to March 2024, Foreign Direct Investment attracting top five sectors (in terms of US$) are as follows:

Services Sector (16.13%), Computer Software and Hardware (15.16%), Trading (6.39%), Telecommunications (5.79%) and Automobile Industry (5.34%). Total FDI inflow into India 2023-24 (April-March) is estimated at US $ 44423 million.

Sectors attracting highest FDI equity inflows during 2023-24 (April-March) are as follows: 1. Computer Software and Hard- ware (US $ 7973 million), 2. Services Sector (US $ 6640 mil- lion), 3. Construction (Infrastructure) Activities (US $ 6232 million), 4. Trading (US$ 3865 million), 5. Power (USS 1701 million).

40. Which of the following sectors has attracted the highest foreign direct investment flow in India in the last one decade? [Chhattisgarh P.C.S. (Pre) 2016]

Correct Answer: (b) Service sector
Solution:As per the question period option (b) was the correct answer. For the latest data, While in the present context, services sector has attracted the highest Foreign Direct Investment (FDI) inflows into India in the last two decades. During April 2000 to March 2024, Foreign Direct Investment attracting top five sectors (in terms of US$) are as follows:

Services Sector (16.13%), Computer Software and Hardware (15.16%), Trading (6.39%), Telecommunications (5.79%) and Automobile Industry (5.34%). Total FDI inflow into India 2023-24 (April-March) is estimated at US $ 44423 million.

Sectors attracting highest FDI equity inflows during 2023-24 (April-March) are as follows: 1. Computer Software and Hard- ware (US $ 7973 million), 2. Services Sector (US $ 6640 mil- lion), 3. Construction (Infrastructure) Activities (US $ 6232 million), 4. Trading (US$ 3865 million), 5. Power (USS 1701 million).