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.
1 only
1 and 3 only
2 only
1, 2 and 3
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC IAS – 2019
Statement 1: The foreign currency earnings of India’s IT sector represent significant inflows of foreign exchange, boosting the country’s reserves. This directly helps in building a buffer against potential crises and reduces the risk.
Statement 3: Remittances from Indians abroad are also a major source of foreign currency inflow into India. Similar to IT sector earnings, remittances augment foreign exchange reserves and contribute to external stability, thus reducing the risk of a currency crisis.
Statement 2: Increasing government expenditure, if not financed sustainably, can lead to higher fiscal deficits. This can potentially exacerbate current account deficits (if it stimulates imports) or lead to inflation, which can erode confidence in the currency and potentially increase the risk of external instability, rather than reduce it.
Therefore, factors 1 and 3 contribute to reducing the risk of a currency crisis, while factor 2 is generally considered a potential risk factor if not managed prudently.