In the context of India, which of the following factors is/are contributor/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.
- (a) 1 only
- (b) 1 and 3 only ✓ UPSC's answer
- (c) 2 only
- (d) 1, 2 and 3
Why the answer is (b)
• A currency crisis arises when foreign-exchange inflows dry up and the rupee faces a run; steady, non-debt inflows are the best protection.
• IT-services exports (1) earn over US$ 150 billion a year and remittances (3) another US$ 80–100 billion, both stable dollar inflows that shore up the current account and reserves.
• Increasing government expenditure (2) widens the fiscal deficit, can push up inflation and the current account deficit, and worsens rather than reduces crisis risk.
• Hence 1 and 3 only, option (b).
Why the other options are wrong
- (a) 1 only
- Remittances are also a major stabilising inflow.
- (c) 2 only
- Higher government spending increases, not reduces, crisis risk.
- (d) 1, 2 and 3
- Factor 2 worsens vulnerability.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2019, held on 2 June 2019. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.