UPSC Prelims 2020 Question:

If another global financial crisis happens in the near future, which of the following actions/policies are most likely to give some immunity to India?

1. Not depending on short-term foreign borrowings 
2. Opening up to more foreign banks 
3. Maintaining full capital account convertibility
   
   

Select the correct answer using the code given below:

Explanation:

• To gain some immunity from global financial crisis, policies that reduce exposure to foreign financial markets shall be adopted.
  
  
• Short-term debts have to be returned at a shorter interval. This renders an economy vulnerable if the economy is already facing economic crisis as it has an obligation to return the debt as well as interest payments (debt service). Example: Many economies like Mexico, Argentina etc who faced crisis were seen to have borrowed large amounts of short-maturity debt. So, the ideal scenarios is not to depend upon short-term debt during crisis. So, point 1 is correct.
  
  
• Opening up to more foreign banks would increase the  dependence of Indian economy on the global financial market. Thus, increasing the risk of being affected by the possible global financial crisis in future. So, statement 2 is not correct.
  
  

• Capital account convertibility would mean that there is no restriction on conversion of the domestic currency into a foreign currency. It is recognised that capital flows are sensitive to macroeconomic conditions. Any deterioration in fiscal conditions, inflation management, balance of payments, or any other economic crisis may cause a cessation or reversal of capital flows. This might make the economy vulnerable if it already suffering from economic crisis. So, statement 3 is not correct.
  
  

Therefore, option (1) is the correct answer.

Subject: Economics | Balance of Payments and Foreign Reserves