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

Explanation

Statement 1 is correct: As of 2023 the Asian Infrastructure Investment Bank (AIIB) had 105 member’s. As of January 2025 the AIIB boasts 110 approved members worldwide which indicates its extensive global reach.

Statement 2 is incorrect: India is the second-largest shareholder in AIIB and holds 7.5% of the voting shares. The largest shareholder is China with 26.5% of the voting shares.

Statement 3 is incorrect: The AIIB’s membership extends beyond Asia and includes countries from Europe, Africa and the Americas. For instance nations like Canada, Egypt, and France are members and reflects the bank’s global appeal.

Explanation

A currency crisis occurs when a country’s currency faces a sudden and sharp depreciation, often due to speculative attacks or a loss of confidence in the economy. Several factors can contribute to reducing the risk of such a crisis:

Statement 1 is correct: India’s Information Technology (IT) sector is a major exporter of services, earning substantial foreign exchange. These earnings increase the supply of foreign currency in the country, strengthening the Indian rupee and mitigating the risk of a currency crisis.

Statement 2 is incorrect: While government spending is crucial for economic growth, excessive expenditure can lead to higher fiscal deficits. This may result in increased borrowing, potential inflationary pressures, and could negatively affect investor confidence, thereby increasing the risk of a currency crisis.

Statement 3 is correct: Remittances are funds sent by Indians working overseas back to India. These inflows add to the coun-try’s foreign exchange reserves, providing a buffer against currency volatility and reducing the risk of a currency crisis.

Explanation

Statement 1 is incorrect: While the government does hold a portion of India’s external debt, the majority of it is owed by non-governmental entities, primarily corporations. As of end-March 2023, India’s total external debt stood at approximately USD 624.7 billion. Of this, the government’s external debt was about USD 130.8 billion, accounting for roughly 20.9% of the total external debt. The remaining 79.1% is owed by non-governmental entities, including private sector corporations and financial institutions.

Statement 2 is incorrect: While a significant portion of In-dia’s external debt is indeed denominated in US dollars, it’s not all in US dollars. Indian entities also borrow in other currencies, such as Euros, Japanese Yen, and British Pounds, among others. Diversification of currency exposure is a com-mon practice in debt management. India’s external debt is de-nominated in various currencies. As of end-March 2023, 53.1% of the debt was in US dollars, 31.1% in Indian rupees, 5.7% in Japanese yen, 3.5% in Special Drawing Rights (SDRs), 2.9% in euros, and the remaining 3.7% in other currencies.

Explanation

Statement 1 is correct: PPP is an economic concept that compares the value of currencies by examining the cost of a standard "basket of goods" across different countries. It determines the exchange rate required for one currency to buy the same quantity of goods and services as it would in another country.

Statement 2 is incorrect: As of the latest available data, India ranks as the third-largest economy globally in terms of GDP based on PPP. According to the International Monetary Fund’s World Economic Outlook, India’s GDP (PPP) is approximately $13.17 trillion, placing it behind China and the United States.