Foreign Exchange, FDI & External Debt (Part

Total Questions: 50

21. Most recently, FDI has now opened in which of the following sectors in India? [U.P.P.C.S. (Mains) 2010]

(a) Gambling and betting for profit
(b) Lottery business
(c) Chit fund and Nidhi
(d) Retail trade

Correct Answer: (d) Retail trade

Solution:In 2006, the Government eased policy for FDI in retail sector for the first time, allowing up to 51 percent FDI through the single-brand retail route. In 2012, the Government allowed up to 51 percent FDI in multi-brand retail. The Government also approved 100 percent FDI in single-brand retail, with the requirement of 30 percent local sourcing, preferably from MSMEs and cottage industries etc.

Foreign Direct Investment can be undertaken through different methods. These methods, commonly referred to as Greenfield and Brownfield investments, reflect different approaches to entering foreign markets and expanding business operations.
Greenfield Investment: This method involves establishing a new operation or business from the ground up in the host country, such as building new plants, offices, or manufacturing facilities. This allows investors to have full control over the business's setup and operations.
Brownfield Investment: In contrast, a Brownfield investment occurs when a foreign investor acquires or merges with an existing company in the host country. Rather than starting a new business from scratch, the investor uses existing infrastructure and operations to expand their presence in the market.

22. With reference of foreign-owned e-commerce firms operating in India, which of the following statements is/are correct? [I.A.S. (Pre) 2022]

1. They can sell their own goods in addition to offering their platforms as market-places.

2. The degree to which they can own big sellers on their platforms is limited.

Select the correct answer using the code given below:

(a) I only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Correct Answer: (b) 2 only

Solution:The FDI Policy allows 100% FDI under the automatic route for the marketplace model of e-commerce activities. How ever, FDI is not permitted for the inventory-based model of e-commerce activities. E-commerce entities providing marketplace cannot exercise control or ownership over the inventory, i.e. the goods professed to be sold. Such control or ownership over the inventory renders the e-commerce business into an inventory-based model. The Ministry of Consumer Affairs has also specified that an e-commerce market- place entity shall not sell any goods owned or controlled by it on such e-commerce marketplace platform. Inventory of a vendor will be deemed to be controlled by e-commerce marketplace entity if more than 25% of purchases of such vendor are from the marketplace entity or its group companies. Thus, the degree to which foreign-owned e-commerce entities can own big sellers on their platform is limited. Hence, statement 1 is incorrect while statement 2 is correct.

23. On October 4, 2012, the Government of India has proposed to change the limits of FDI in Insurance Sector. It is proposed to: [U.P.P.C.S. (Mains) 2012]

(a) raise the FDI limit from 26% to 49%
(b) raise the FDI limit from 49% to 74%
(c) raise the FDI limit from 26% to 51%
(d) decrease the FDI limit from 74% to 49%

Correct Answer: (a) raise the FDI limit from 26% to 49%

Solution:On 4th October, 2012, the Government of India had proposed to change the limits of FDI in Insurance Sector from 26% to 49%. In Union Budget 2021-22, the Finance Minister announced an increase in the FDI limit for Insurance Sector from 49% to 74% which came into effect on May 19, 2021.

The Foreign Direct Investment (FDI) limits in India vary by sector and are based on the sensitivity of the sector. Following are the FDI limits for different sectors in India:

Sector	FDI Limit
E-commerce	– 100% (automatic route) in marketplace model e-commerce. (FDI in inventory-based e-commerce is not allowed)
Civil Aviation (Maintenance, Repair, and Overhaul)	100% (automatic route)
Railway Infrastructure	100% (automatic route)
Print Media	26% (automatic route)
Private Sector Banking	49%(automatic route); Up to 74% (government approval)
Pharmaceuticals	100% (automatic route) in greenfield projects; Up to 74% in brownfield projects
Defence	74% (automatic route); Up to 100% (Government approval)

24. In the recent Union Budget, the FM has increased the Foreign Direct Investment (FDI) limit in the insurance sector from the existing one to: [B.P.S.C. (Pre) 2022]

Correct Answer: (c) 74%

The Foreign Direct Investment (FDI) limits in India vary by sector and are based on the sensitivity of the sector. Following are the FDI limits for different sectors in India:

Sector	FDI Limit
E-commerce	– 100% (automatic route) in marketplace model e-commerce. (FDI in inventory-based e-commerce is not allowed)
Civil Aviation (Maintenance, Repair, and Overhaul)	100% (automatic route)
Railway Infrastructure	100% (automatic route)
Print Media	26% (automatic route)
Private Sector Banking	49%(automatic route); Up to 74% (government approval)
Pharmaceuticals	100% (automatic route) in greenfield projects; Up to 74% in brownfield projects
Defence	74% (automatic route); Up to 100% (Government approval)

25. Foreign equity holding allowed in small scale sector in 1995-96 is: [U.P.P.C.S. (Pre) 1995]

(a) 35%
(b) 24%
(c) 49%
(d) 51%

Correct Answer: (b) 24%

Solution:Except for the prohibited sector, foreign investors are allowed to invest in small-scale industrial (SSI) units operating in various sectors. Foreign equity holding in a small scale industrial unit was limited to 24% in 1995-96. If FDI in an SSI unit exceeds 24% of the paid up capital, the company had to lose its SSI status. Presently, most sector/ activities including Micro, Small and Medium Enterprises (MSMEs) except certain strategically important sectors/activities are open for 100% FDI under the automatic route, subject to sectoral laws, regulation/rules, security conditions and state/local laws/regulations.

26. A country is said to be in debt trap if: [I.A.S. (Pre) 2002]

(a) it has to abide by the conditionalities imposed by the International Monetary Fund
(b) it has to borrow to make interest payments on outstanding loans
(c) it has been refused loans or aid by creditors abroad
(d) the World Bank charges a very high rate of interest on outstanding as well as new loans

Correct Answer: (b) it has to borrow to make interest payments on outstanding loans

Solution:A country is said to be in debt trap when it has to take new loans to pay the interests due on the loans taken in the past. It is a situation in which outstanding loans are difficult or impossible to repay, generally because high interest payments prevent repayment of the principal.

While following IMF conditionalities can contribute to debt problems, it's not the defining characteristic of a debt trap.
Being refused loans or aid might indicate financial difficulties, but it doesn't necessarily define a debt trap. A debt trap is characterized by the ongoing cycle of borrowing to service existing debts, not the lack of access to new loans.
High interest rates can certainly exacerbate a debt trap, but they're not the sole defining factor. A debt trap is defined by the need to borrow to pay interest on existing debts, regardless of the specific interest rate. A high interest rate can make the situation worse, but it's not the essential element.

27. At the end of 2010, India's external debt had cross the mark of: [U.P.P.C.S. (Mains) 2010*]

(a) US $ 100 Billion
(b) US $ 300 Billion
(c) US $ 500 Billion
(d) US $ 1000 Billion

Correct Answer: (b) US $ 300 Billion

Solution:

As per the question period, option (b) was the correct answer.
At end-March 2024, India's external debt was US$ 663.8 billion, an increase of US$ 39.7billionover its level at end-March 2023.
The external debt-to-GDP ratio declined to 18.7 percent end-March 2024 from 19.0 percent at end-March 2023.
The Valuation effect due to the appreciation of the US dollar vis-à-vis the Indian rupee and other major currencies such as the yen, euro, and SDR amounted to US$ 8.7 billion.
Valuation effects are the change in value of assets held abroad with regard to the value of domestic assets held by foreign investors.
Excluding the valuation effect, external debt would have increased by US$ 48.4 billion instead of US$ 39.7 billion at end-March 2024 over end-March 2023.
At end-March 2024, long-term debt (with an original maturity of above one year) was placed at US$ 541.2 billion, recording an increase of US$ 45.6 billion over its level at end-March 2023.
The share of short-term debt (with an original maturity of up to one year) in total external debt declined to 18.5 percent at end-March 2024 from 20.6 per cent at end-March 2023.

28. Consider the following statements: [I.A.S. (Pre) 2019]

1. Most of India's external debt is owed by governmental entities.

2. All of India' external debt is denominated in US dollars.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Correct Answer: (d) Neither 1 nor 2

Solution:Statement 1 is incorrect as most of India's external debt is owed by non-governmental entities. At end-December 2023 (P), India's external debt was placed at US $ 648.2 billion, in which government external debt (Sovereign debt) was US $ 142.2 billion while non-government external debt stood at US $ 506.0 billion.

Statement 2 is also incorrect because not all of India's external debt is denominated in US dollars. Actually, US dollar denominated debt continued to be the largest component of India's external debt, with a share of 54.2 percent at end-December, 2023 (P), followed by the Indian Rupee (30.7 percent), Yen (5.9 percent), SDR (5.6 percent), and the Euro (2.9 percent).

29. Which of the following continued to be the major component of India's external credit till 2017? [U.P. R.O./A.R.O. (Pre) 2017]

(a) NRI deposits
(b) Short term debt
(c) Trade Credit
(d) Commercial borrowing

Correct Answer: (d) Commercial borrowing

Solution:Commercial borrowings continued to be the major component of India's external debt in 2017 and its share was about 38 percent in total external debt. At end-December 2023 (P), India's external debt was placed at US $ 648.2 billion and loans (commercial borrowings) remained the largest component of external debt, with a share of 33.2 percent.

About External Commercial Borrowings (ECBs):

ECBs refer to the borrowing of funds by Indian companies from foreign sources in the form of loans, bonds, or other financial instruments.
Purpose: It can be used to finance a variety of purposes, including the expansion of business, the acquisition of assets, and the repayment of existing debt.
Source of ECBs: ECBs can be obtained from a variety of sources, including foreign banks, international financial institutions, and foreign subsidiaries of Indian companies.
ECB can be in the form of rupee-denominated loans, which are repaid in Indian rupees, or foreign currency-denominated loans, which are repaid in a foreign currency.

30. India's external debt increased from US$ 98,158 million as at the end of March 2000 to US $ 100,225 million as at the end of March 2001 due to increase in: [I.A.S. (Pre) 2002-]

(a) multilateral and bilateral debt
(b) rupee debt
(c) commercial borrowings and NRI deposits
(d) borrowing from International Monetary Fund

Correct Answer: (c) commercial borrowings and NRI deposits

Solution:As per the question period, option (c) was the correct answer. Variations in different components of India's external debt in end-March 2023 over end-March 2022 are as follows:

Outstanding External Debt (in US$ billion)

Component

End-March 2023

End-March 2022

Variation (US$ billion)

1. Multilateral

74.8

72.9

1.9

2. Bilateral

34.6

32.5

2.1

3. IMF

22.3

4. Trade Credit

2.9

3.3

5. Commercial Borrowings

222.0

225.8

-3.8

6. NRI Deposits (above one year maturity)

138.9

139.0

-0.1

7. Rupee Debt

0.8

1.0

8. Short-term Creditors

128.4

121.7

6.7

(a) Trade-related creditors

123.9

117.4

6.5

Total External Debt

624.7

619.1

5.6

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Foreign Exchange, FDI & External Debt (Part – II)