External Sector of Economy

21. With reference to the international trade of India at present, which o

With reference to the international trade of India at present, which of the following statements is/are correct ?

  • 1. India’s merchandise exports are less than its merchandise imports.
  • 2. India’s imports of iron and steel, chemicals, fertilizers and machinery have decreased in recent years.
  • 3. India’s exports of services are more than its imports of services.
  • 4. India suffers from an overall trade/current account deficit.

Select the correct answer using the code given below :

1 and 2 only
2 and 4 only
3 only
1, 3 and 4 only
This question was previously asked in
UPSC IAS – 2020
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The question asks about correct statements regarding India’s current international trade situation.
– 1. India’s merchandise exports are historically less than its merchandise imports, resulting in a merchandise trade deficit. This statement is generally correct based on persistent trends.
– 2. India’s imports of iron and steel, chemicals, fertilizers, and machinery are typically significant due to industrial and agricultural needs. While imports can fluctuate, a general decrease across all these major categories in recent years is unlikely given India’s economic growth and reliance on these items. This statement is likely incorrect.
– 3. India has a strong services sector, particularly IT and BPO, leading to a consistent surplus in services trade (exports of services are more than imports). This statement is correct.
– 4. Despite a surplus in services trade, India’s large merchandise trade deficit usually results in an overall current account deficit (CAD), meaning total imports of goods, services, income, and transfers exceed total exports and receipts. This statement is correct.
India’s balance of payments position is significantly influenced by its merchandise trade deficit, which is partially offset by its services trade surplus and remittances. However, the net effect often results in a current account deficit.

22. With reference to Foreign Direct Investment in India, which one of the

With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic ?

It is the investment through capital instruments essentially in a listed company.
It is a largely non-debt creating capital flow.
It is the investment which involves debt-servicing.
It is the investment made by foreign institutional investors in the Government securities.
This question was previously asked in
UPSC IAS – 2020
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The question asks for a major characteristic of Foreign Direct Investment (FDI) in India.
– A) FDI can be made in both listed and unlisted companies, not essentially limited to listed ones. Incorrect.
– B) FDI primarily involves equity investment, meaning the foreign investor takes ownership stake in the domestic company. This inflow of capital is largely non-debt creating for the host country’s balance of payments, unlike external commercial borrowings or portfolio debt. This is a major characteristic. Correct.
– C) While the business receiving FDI might take on debt, the FDI inflow itself is equity, which leads to profit sharing or capital gains, not debt servicing in the traditional sense for the host economy’s external liabilities related to the FDI equity. Incorrect.
– D) Investment by foreign institutional investors (now Foreign Portfolio Investors – FPIs) in government securities is classified as Foreign Portfolio Investment (FPI), not FDI. FDI involves acquiring a lasting interest and control in an enterprise. Incorrect.
FDI is distinguished from FPI by the level of ownership and control acquired by the foreign investor. FDI typically involves a significant stake aimed at influencing management, while FPI is usually passive investment in securities.

23. In which one of the following groups are all the four countries member

In which one of the following groups are all the four countries members of G20 ?

Argentina, Mexico, South Africa and Turkey
Australia, Canada, Malaysia and New Zealand
Brazil, Iran, Saudi Arabia and Vietnam
Indonesia, Japan, Singapore and South Korea
This question was previously asked in
UPSC IAS – 2020
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The G20 (Group of Twenty) is an international forum for the governments and central bank governors from 19 countries and the European Union. The member countries are: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States.
Let’s examine the options:
A) Argentina, Mexico, South Africa, and Turkey: All four countries (Argentina, Mexico, South Africa, Turkey) are members of the G20.
B) Australia, Canada, Malaysia, and New Zealand: Australia and Canada are G20 members, but Malaysia and New Zealand are not.
C) Brazil, Iran, Saudi Arabia, and Vietnam: Brazil and Saudi Arabia are G20 members, but Iran and Vietnam are not.
D) Indonesia, Japan, Singapore, and South Korea: Indonesia, Japan, and South Korea are G20 members, but Singapore is not.
Therefore, only option A lists four countries that are all members of the G20.
Recognizing the member countries of major international groupings like the G20 is essential for international relations and economy topics.
The G20 represents about two-thirds of the world’s population, 85% of global gross domestic product, and 75% of international trade. It works on major issues related to the global economy, such as international financial stability, climate change mitigation, and sustainable development.

24. Consider the following statements : The value of Indo-Sri Lanka trad

Consider the following statements :

  • The value of Indo-Sri Lanka trade has consistently increased in the last decade.
  • “Textile and textile articles” constitute an important item of trade between India and Bangladesh.
  • In the last five years, Nepal has been the largest trading partner of India in South Asia.

Which of the statements given above is/are correct ?

1 and 2 only
2 only
3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2020
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Statement 1 is incorrect: While Indo-Sri Lanka trade has grown over the longer term, it has not consistently increased every single year over the last decade. Trade figures can fluctuate due to various economic factors, policy changes, and external shocks (like the COVID-19 pandemic or Sri Lanka’s economic crisis).
Statement 2 is correct: “Textile and textile articles” are indeed an important and growing component of trade between India and Bangladesh. India exports cotton and yarns to Bangladesh, while Bangladesh exports garments and other textile products to India.
Statement 3 is incorrect: In the last five years, Bangladesh has been India’s largest trading partner in South Asia. Nepal is a significant partner, but its total trade value with India is typically lower than that of Bangladesh.
Evaluating trade relationships requires looking at specific country data and trends. Bangladesh is a major trading partner for India in South Asia, with textiles being a key sector in their bilateral trade.
India’s major trading partners in South Asia include Bangladesh, Sri Lanka, Nepal, and Bhutan. The volume and composition of trade vary with each country based on geographical proximity, bilateral agreements (like SAFTA), and economic structures.

25. With reference to Asian Infrastructure Investment Bank (AIIB), conside

With reference to Asian Infrastructure Investment Bank (AIIB), consider the following statements:

  • 1. AIIB has more than 80 member nations.
  • 2. India is the largest shareholder in AIIB.
  • 3. AIIB does not have any members from outside Asia.

Which of the statements given above is/are correct?

1 only
2 and 3 only
1 and 3 only
1, 2 and 3
This question was previously asked in
UPSC IAS – 2019
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Statement 1: The Asian Infrastructure Investment Bank (AIIB) has expanded its membership significantly since its inception in 2016. As of late 2023/early 2024, AIIB has over 100 approved members from across the globe. The statement “more than 80 member nations” is correct as it falls within the actual number of members.
Statement 2: China is the largest shareholder in the AIIB, holding the largest voting share. India is the second-largest shareholder. Thus, Statement 2 is incorrect.
Statement 3: AIIB is not exclusively limited to Asian members. It has actively sought and included members from outside Asia, including countries from Europe (e.g., Germany, France, UK), Africa (e.g., South Africa, Egypt), Oceania (e.g., Australia, New Zealand), and Latin America (e.g., Brazil). Thus, Statement 3 is incorrect.
Based on the analysis, only Statement 1 is correct.
AIIB is a multilateral development bank with a broad global membership extending beyond Asia, where China is the largest shareholder and India is the second largest.
AIIB’s mission is to finance infrastructure projects in Asia and beyond. It was proposed by China and is seen as a complementary institution to existing multilateral development banks like the World Bank and the Asian Development Bank. Its growing membership from various continents reflects its ambition to be a global infrastructure bank.

26. Which of the following is issued by registered foreign portfolio inves

Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly?

Certificate of Deposit
Commercial Paper
Promissory Note
Participatory Note
This question was previously asked in
UPSC IAS – 2019
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Participatory Notes (P-Notes) are financial instruments used by registered Foreign Portfolio Investors (FPIs) to invest in Indian securities without directly registering themselves with the Securities and Exchange Board of India (SEBI). These notes are issued by the FPIs to overseas investors, who essentially gain exposure to the Indian stock market performance through these instruments. This allows overseas investors who may find the direct registration process cumbersome to participate in the Indian market.
Participatory Notes (P-Notes) allow unregistered overseas investors to indirectly invest in Indian securities through registered FPIs.
Certificate of Deposit (CD) is a short-term debt instrument issued by banks. Commercial Paper (CP) is a short-term unsecured promissory note issued by companies. A Promissory Note is a general term for a written promise to pay a specific amount. None of these instruments serve the specific function of enabling indirect access to the Indian stock market for overseas investors via registered intermediaries in the way P-Notes do.

27. In the context of India, which of the following factors is/are contrib

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
This question was previously asked in
UPSC IAS – 2019
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The question asks which factors contribute to reducing the risk of a currency crisis in India. A currency crisis is often associated with insufficient foreign exchange reserves to meet external obligations or defend the currency’s value against speculative attacks. Factors that increase foreign currency inflows or reduce dependence on foreign currency outflows help mitigate this risk.
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.
Strong foreign currency inflows from sources like IT exports and remittances increase foreign exchange reserves, which act as a buffer against currency crises. Unchecked increases in government expenditure can potentially increase external vulnerabilities.
A currency crisis typically involves a sharp decline in the value of a country’s currency, often accompanied by a depletion of foreign exchange reserves and difficulties in servicing external debt. Building up foreign exchange reserves through exports, services earnings, remittances, and foreign investment inflows is a key strategy for preventing such crises. Conversely, large and persistent current account deficits, unsustainable fiscal policies, excessive external borrowing, and capital flight can increase the vulnerability to a currency crisis.

28. Consider the following statements : 1. Most of India’s external debt

Consider the following statements :

  • 1. Most of India’s external debt is owed by governmental entities.
  • 2. All of India’s external debt is denominated in US dollars.

Which of the statements given above is/are correct?

1 only
2 only
Both 1 and 2
Neither 1 nor 2
This question was previously asked in
UPSC IAS – 2019
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Neither statement 1 nor statement 2 is correct.
Statement 1 is incorrect. India’s external debt is owed by various sectors, including sovereign (government) and non-sovereign entities (such as corporate sector, banks, and NRI depositors). Data from the Reserve Bank of India (RBI) consistently shows that non-sovereign debt constitutes a larger portion of India’s total external debt than sovereign debt. For instance, non-sovereign debt often accounts for over three-fourths of the total external debt.

Statement 2 is incorrect. India’s external debt is denominated in multiple currencies. While the US dollar is the dominant currency, a significant portion is also denominated in Indian Rupees (e.g., Rupee Denominated Bonds held by non-residents), SDRs, Japanese Yen, Euro, and other currencies. Therefore, not all of India’s external debt is denominated in US dollars.

India’s external debt composition is monitored closely by the government and RBI. Key components of non-sovereign debt include commercial borrowings, NRI deposits, short-term trade credit, and rupee debt. The currency composition is important for assessing exchange rate risk.

29. Among the following, which one is the largest exporter of rice in the

Among the following, which one is the largest exporter of rice in the world in the last five years?

China
India
Myanmar
Vietnam
This question was previously asked in
UPSC IAS – 2019
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The correct answer is B) India.
In recent years, specifically over the last five years (leading up to when this question was likely framed), India has consistently been the world’s largest exporter of rice. Countries like Thailand, Vietnam, Pakistan, and the United States are also major rice exporters, but India has held the top position.
India’s dominant position in rice exports is due to its large production volume and competitive prices. While China is the largest producer of rice globally, it is also a massive consumer and often needs to import rice, rather than being a major exporter. The global rice market is dynamic, but India’s position as the leading exporter has been stable in the recent past.

30. Consider the following countries: 1. Australia 2. Canada 3. China 4. I

Consider the following countries:
1. Australia
2. Canada
3. China
4. India
5. Japan
6. USA
Which of the above are among the ‘free-trade partners’ of ASEAN?

1, 2, 4 and 5
3, 4, 5 and 6
1, 3, 4 and 5
2, 3, 4 and 6
This question was previously asked in
UPSC IAS – 2018
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The Association of Southeast Asian Nations (ASEAN) has established Free Trade Agreements (FTAs) or Comprehensive Economic Partnerships with several countries. Among the options provided, Australia, China, India, and Japan are ASEAN’s free-trade partners through various agreements such as the ASEAN-China FTA (ACFTA), ASEAN-India FTA (AIFTA), ASEAN-Japan Comprehensive Economic Partnership (AJCEP), and the ASEAN-Australia-New Zealand FTA (AANZFTA).
Countries that have FTAs with ASEAN include Australia, China, India, Japan, South Korea, and New Zealand. Additionally, these countries plus ASEAN members are part of the larger Regional Comprehensive Economic Partnership (RCEP) agreement.
Canada and the USA do not currently have comprehensive free-trade agreements with ASEAN as a bloc, although individual ASEAN member states might have separate trade agreements with these countries.
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