Previous Year Question

A currency crisis refers to a situation in which a country’s currency comes under severe depreciation pressure. It may result from a sharp rise in demand for foreign currency, capital outflows, a widening Current Account Deficit or inadequate Forex Reserves.

Statement 1 is correct

India’s IT and IT-enabled services sector earns foreign currency by exporting services.

When an Indian IT company provides services to an overseas client, payment is generally received in foreign currency. These earnings:

• Increase services-export receipts in the Balance of Payments.

• Help finance the Current Account Deficit.

• Increase the domestic availability of foreign currency.

• Reduce depreciation pressure on the rupee.

• Strengthen the capacity to accumulate Forex Reserves.

Therefore, the foreign-currency earnings of the IT sector reduce India’s external vulnerability.

Statement 2 is incorrect

An increase in government expenditure does not automatically generate foreign-exchange earnings. If it raises aggregate demand and imports, it may:

• Widen the Trade Deficit and Current Account Deficit.

• Increase demand for foreign currency.

• Increase the Fiscal Deficit and government borrowing.

• Raise the risk of capital outflows if investor confidence weakens.

Thus, increasing government expenditure by itself cannot be treated as a factor that necessarily reduces the risk of a currency crisis.

Statement 3 is correct

Money transferred to India by Indians working abroad is recorded as Workers’ Remittances or private transfers.

Remittances provide a relatively stable source of foreign-exchange inflow. They:

• Enter the Current Account under secondary-income receipts.

• Finance a part of the Merchandise Trade Deficit.

• Support household income and domestic consumption.

• Reduce pressure on external payments.

• Support Forex Reserves and currency stability.

India has consistently remained among the world’s largest recipients of remittances. Hence, Statement 3 is correct.