External Sector of India: UPSC Previous Year Questions (Indian Economy)

Explanation

Exports are goods and services that are produced in one country used by another. In economic terms, when foreign nationals visit a country and spend money on goods and services--such as accommodation, food, transportation, and entertainment--it is considered an export for the host country. This is because the country is providing services to non-residents, resulting in an inflow of foreign currency. Therefore, the expenditures by foreign visitors during events like the XIX Commonwealth Games in India are classified as exports.

Explanation

Statement 1 is correct: Devaluation makes a coun-try’s exports cheaper for foreigners and its imports more expensive. This can lead to an increase in export volumes and a decrease in import volumes, which can improve the balance of trade (the difference between exports and imports of goods). An improved trade balance can help reduce the current account deficit.

Statement 2 is incorrect: Reducing export subsidies can make a country’s exports less competitive internationally, potentially decreasing export volumes and worsening the current account deficit.

Statement 3 is correct: While FDI and FII inflows are recorded in the capital account, they can indirectly affect the current account. Increased FDI can boost domestic production capacity, leading to higher exports. FDI and FII inflows can strengthen the domestic currency, making imports cheaper and potentially widening the CAD.

Explanation

The International Monetary Fund (IMF) is an inter-national organization that provides financial assistance to its member countries facing balance of payments problems. The IMF’s primary purpose is to ensure the stability of the international monetary system by offering financial support and policy advice to its members. Only countries that are members of the IMF are eligible to receive loans. As of now, the IMF has 190 member countries. Non-member countries are not eligible for IMF financial assistance. The IMF provides financial support to member countries to help them address balance of payments problems, stabilize their economies, and restore sustainable economic growth. This assistance is typically accompanied by policy conditions aimed at correcting the underlying economic issues that led to the need for support.

Explanation

FDI is characterized by long-term investments aimed at establishing a lasting interest in specific sectors, whereas FII involves short-term investments that can be easily liquidated. FDI contributes to the development of specific industries through direct involvement, while FII enhances capital availability across the financial markets without direct control over companies. Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) are two distinct forms of foreign investments, each with unique characteristics and impacts on the host country’s economy. Foreign Direct Investment (FDI) involves a long-term commitment where a foreign entity invests directly in the physical assets of a domestic company, such as establishing operations, acquiring machinery, or building infrastructure. It is typically directed towards specific sectors or industries where the foreign investor seeks to establish a lasting interest and exert significant control or influence over the management of the enterprise. Beyond capital infusion, FDI brings in advanced management practices, technology transfer, and can lead to job creation and overall economic development in the targeted sectors. Foreign Institutional Investment (FII) refers to investments made by foreign institutional investors, such as mutual funds, pension funds, and insurance companies, in a country’s financial markets, primarily in equities and bonds. It increases the overall capital availability in the financial markets, providing liquidity and potentially lowering the cost of capital for domestic firms. FII investments are generally more fluid and can be withdrawn quickly, making them more sensitive to market conditions and contributing to potential volatility.