Balance of Payments – Indian Economy, Previous Year Questions(UPSC CSE)(2011-24)

1. Consider the following statements:

1. Tight monetary policy of US Federal Reserve could lead to capital flight.

2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).

3. Devaluation of domestic currency decreases the currency risk associated with ECBS.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

2. With reference to the Indian economy, consider the following statements:

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.

2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.

3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.

Which of the above statements are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

3. With reference to the Indian economy, consider the following statements:

1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.

2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.

3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

4. Consider the following:

1. Foreign currency convertible bonds
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

(a) 1, 2 and 3 only

(b) 3 only

(c) 2 and 4 only

(d) 1 and 4 only

5. Consider the following statements: 

The effect of devaluation of a currency is that it necessarily

1. Improves the competitiveness of the domestic exports in the foreign markets
2. Increases the foreign value of domestic currency
3. Improves the trade balance

Which of the above statements is/are correct?

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 2 and 3 only

6. 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:

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 1, 2 and 3

7. In terms of economy, the visit by foreign nationals to witness the XIX Common Wealth Games in India amounted to 

(a) Export

(b) Import

(c) Production

(d) Consumption

8. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?

(a) FII helps bring better management skills and technology, while FDI only brings in capital

(b) FII helps in increasing capital availability in general, while FDI only targets specific sectors

(c) FDI flows only into the secondary market, while FII targets primary market.

(d) FII is considered to be more stable than FDI

9. Consider the following actions which the Government can take: 

1. Devaluing the domestic currency.
2. Reduction in the export subsidy.
3. Adopting suitable policies which attract greater FDI and more funds from FIls.

Which, of the above action/actions can help in reducing the current account deficit?

(a) 1 and 2

(b) 2 and 3

(c) 3 only

(d) 1 and 3

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

(a) It is the investment through capital instruments essentially in a listed company.

(b) It is a largely non-debt creating capital flow.

(c) It is the investment which involves debt-servicing.

(d) It is the investment made by foreign institutional investors in the Government securities.

11. 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, fertilisers 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:

(a) 1 and 2 only

(b) 2 and 4 only

(c) 3 only

(d) 1, 3 and 4 only

12. 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?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

13. 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:

(a) 1 only

(b) 1 and 3 only

(c) 2 only

(d) 1, 2 and 3

14. Consider the following statements:

1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

15. Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

(a) Curbing imports of non-essential goods and promoting exports

(b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds

(c) Easing conditions relating to external commercial borrowing

(d) Following an expansionary monetary policy

16. Which of the following has/have occurred in India after its liberalization of economic policies in 1991? 

1. Share of agriculture in GDP increased enormously.
2. Share of India’s exports in world trade increased.
3. FDI inflows increased. 4. India’s foreign exchange reserves increased enormously.

Select the correct answer using the codes given below:

(a) 1 and 4 only

(b) 2, 3 and 4 only

(c) 2 and 3 only

(d) 1, 2, 3

17. Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with referece to India?

(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment.

(b) A foreign company investing in Indian and paying taxes to the country of its base on the profits arising out of its investment.

(c) An Indian company purchases tangible assests in a foreign country and sells such assets after their value increases and transfers the proceeds to India.

(d) A foreign compnay transfers shares and such shares derive their substantial value from assest located in India.

18. Which of the following best describes the term ‘import cover’, sometimes seen in the news? 

(a) It is the ratio of value of imports to the Gross Domestic Product of a country

(b) It is the total value of imports of a country in a year

(c) It is the ratio between the value of exports and that of imports between two countries

(d) It is the number of months of imports that could be paid for by a country’s international reserves

19. What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme”?

1. To bring the idle gold lying with Indian households into the economy
2. To promote FDI in the gold and jewellery sector
3. To reduce India’s dependence on gold imports

Select the correct answer using the code given below.

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

20. Convertibility of rupee implies:

(a) Being able to convert rupee notes into gold

(b) Allowing the value of rupee to be fixed by market forces

(c) Freely permitting the conversion of rupee to other currencies and vice versa

(d) Developing an international market for currencies in India

21. The problem of international liquidity is related to the non-availability of 

(a) goods and services

(b) gold and silver

(c) dollars and other hard currencies

(d) exportable surplus

22. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account? 

1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights

Select the correct answer using the code given below.

(a) 1 only

(b) 2 and 3

(c) 1 and 3

(d) 1, 2 and 4

23. Which one of the following groups of items is included in India’s foreign-exchange reserves? 

(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries

(b) Foreign-currency assets, gold holdings of the RBI and SDRs

(c) Foreign-currency assets, loans from the World Bank and SDRs

(d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

24. The balance of payments of a country is a systematic record of 

(a) All import and export transactions of a country during a given period of time, normally a year

(b) Goods exported from a country during a year

(c) Economic transaction between the government of one country to another

(d) Capital movements from one country to another

25. Which of the following constitute Capital Account? 

1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment

Select the correct answer using the codes given below.

(a) 1, 2 and 3

(b) 1, 2 and 4

(c) 2, 3 and 4

(d) 1, 3 and 4

26. Consider the following statements: The price of any currency in international decided by the 

1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question

Which of the statements given above are correct?

(a) 1, 2, 3 and 4

(b) 2 and 3 only

(c) 3 and 4 only

(d) 1 and 4 only

27. Which of the following would include Foreign Direct Investment in India? 

1. Subsidiaries of foreign companies in India
2. Majority foreign equity holding in Indian companies
3. Companies exclusively financed by foreign companies
4. Portfolio investment

Select the correct answer using the codes given below:

(a) 1, 2, 3 and 4

(b) 2 and 4 only

(c) 1 and 3 only

(d) 1, 2 and 3 only
28. Consider the following statements: 

The price of any currency in international market is decided by the

1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question.

Select the correct answer using the codes below:

(a) 1, 2, 3 and 4 are correct

(b) 2 and 3 are correct

(c) 3 and 4 are correct

(d) 1 and 4 are correct

29. Consider the following statements:

1. The value of Indo-Sri Lanka trade has consistently increased in the last decade.
2. “Textile and textile articles” constitute an important item of trade between India and Bangladesh.
3. 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?

(a) 1 and 2 only

(b) 2 only

(c) 3 only

(d) 1, 2 and 3

30. Consider, the following statements:

Statement-I: India accounts for 3.2% of global export of goods.

Statement-II: Many local companies and some foreign companies operating in India have taken advantage of India’s ‘Production-linked Incentive’ scheme.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

(c) Statement-I is correct but Statement-II is incorrect

(d) Statement-I is incorrect but Statement-II is correct

——————————————————————————————————–

Key with Explanation:

1. Consider the following statements:

1. Tight monetary policy of US Federal Reserve could lead to capital flight.

2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).

3. Devaluation of domestic currency decreases the currency risk associated with ECBS.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Explanation:

2. With reference to the Indian economy, consider the following statements:

1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.

2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.

3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.

Which of the above statements are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Explanation:

3. With reference to the Indian economy, consider the following statements:

1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.

2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.

3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.

Which of the statements given above are correct?

(a) 1 and 2 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Explanation:

4. Consider the following:

1. Foreign currency convertible bonds
2. Foreign institutional investment with certain conditions
3. Global depository receipts
4. Non-resident external deposits

Which of the above can be included in Foreign Direct Investments?

(a) 1, 2 and 3 only

(b) 3 only

(c) 2 and 4 only

(d) 1 and 4 only

Explanation:

5. Consider the following statements: 

The effect of devaluation of a currency is that it necessarily

1. Improves the competitiveness of the domestic exports in the foreign markets
2. Increases the foreign value of domestic currency
3. Improves the trade balance

Which of the above statements is/are correct?

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 2 and 3 only

Explanation:

6. 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:

(a) 1 only

(b) 1 and 2 only

(c) 3 only

(d) 1, 2 and 3

Explanation:

7. In terms of economy, the visit by foreign nationals to witness the XIX Common Wealth Games in India amounted to 

(a) Export

(b) Import

(c) Production

(d) Consumption

Explanation:

8. Both Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII) are related to investment in a country. Which one of the following statements best represents an important difference between the two?

(a) FII helps bring better management skills and technology, while FDI only brings in capital

(b) FII helps in increasing capital availability in general, while FDI only targets specific sectors

(c) FDI flows only into the secondary market, while FII targets primary market.

(d) FII is considered to be more stable than FDI

Explanation:

9. Consider the following actions which the Government can take: 

1. Devaluing the domestic currency.
2. Reduction in the export subsidy.
3. Adopting suitable policies which attract greater FDI and more funds from FIls.

Which, of the above action/actions can help in reducing the current account deficit?

(a) 1 and 2

(b) 2 and 3

(c) 3 only

(d) 1 and 3

Explanation:

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

(a) It is the investment through capital instruments essentially in a listed company.

(b) It is a largely non-debt creating capital flow.

(c) It is the investment which involves debt-servicing.

(d) It is the investment made by foreign institutional investors in the Government securities.

Explanation:

11. 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, fertilisers 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:

(a) 1 and 2 only

(b) 2 and 4 only

(c) 3 only

(d) 1, 3 and 4 only

Explanation:

12. 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?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Explanation:

13. 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:

(a) 1 only

(b) 1 and 3 only

(c) 2 only

(d) 1, 2 and 3

Explanation:

14. Consider the following statements:

1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Explanation:

15. Which one of the following is not the most likely measure the Government/RBI takes to stop the slide of Indian rupee?

(a) Curbing imports of non-essential goods and promoting exports

(b) Encouraging Indian borrowers to issue rupee denominated Masala Bonds

(c) Easing conditions relating to external commercial borrowing

(d) Following an expansionary monetary policy

Explanation:

16. Which of the following has/have occurred in India after its liberalization of economic policies in 1991? 

1. Share of agriculture in GDP increased enormously.
2. Share of India’s exports in world trade increased.
3. FDI inflows increased. 4. India’s foreign exchange reserves increased enormously.

Select the correct answer using the codes given below:

(a) 1 and 4 only

(b) 2, 3 and 4 only

(c) 2 and 3 only

(d) 1, 2, 3

Explanation:

17. Which one of the following situations best reflects “Indirect Transfers” often talked about in media recently with referece to India?

(a) An Indian company investing in a foreign enterprise and paying taxes to the foreign country on the profits arising out of its investment.

(b) A foreign company investing in Indian and paying taxes to the country of its base on the profits arising out of its investment.

(c) An Indian company purchases tangible assests in a foreign country and sells such assets after their value increases and transfers the proceeds to India.

(d) A foreign compnay transfers shares and such shares derive their substantial value from assest located in India.

Explanation:

18. Which of the following best describes the term ‘import cover’, sometimes seen in the news? 

(a) It is the ratio of value of imports to the Gross Domestic Product of a country

(b) It is the total value of imports of a country in a year

(c) It is the ratio between the value of exports and that of imports between two countries

(d) It is the number of months of imports that could be paid for by a country’s international reserves

Explanation:

19. What is/are the purpose/purposes of Government’s ‘Sovereign Gold Bond Scheme’ and ‘Gold Monetization Scheme”?

1. To bring the idle gold lying with Indian households into the economy
2. To promote FDI in the gold and jewellery sector
3. To reduce India’s dependence on gold imports

Select the correct answer using the code given below.

(a) 1 only

(b) 2 and 3 only

(c) 1 and 3 only

(d) 1, 2 and 3

Explanation:

20. Convertibility of rupee implies:

(a) Being able to convert rupee notes into gold

(b) Allowing the value of rupee to be fixed by market forces

(c) Freely permitting the conversion of rupee to other currencies and vice versa

(d) Developing an international market for currencies in India

Explanation:

21. The problem of international liquidity is related to the non-availability of 

(a) goods and services

(b) gold and silver

(c) dollars and other hard currencies

(d) exportable surplus

Explanation:

22. With reference to Balance of Payments, which of the following constitutes/ constitute the Current Account? 

1. Balance of trade
2. Foreign assets
3. Balance of invisibles
4. Special Drawing Rights

Select the correct answer using the code given below.

(a) 1 only

(b) 2 and 3

(c) 1 and 3

(d) 1, 2 and 4

Explanation:

23. Which one of the following groups of items is included in India’s foreign-exchange reserves? 

(a) Foreign-currency assets, Special Drawing Rights (SDRs) and loans from foreign countries

(b) Foreign-currency assets, gold holdings of the RBI and SDRs

(c) Foreign-currency assets, loans from the World Bank and SDRs

(d) Foreign-currency assets, gold holdings of the RBI and loans from the World Bank

Explanation:

24. The balance of payments of a country is a systematic record of 

(a) All import and export transactions of a country during a given period of time, normally a year

(b) Goods exported from a country during a year

(c) Economic transaction between the government of one country to another

(d) Capital movements from one country to another

Explanation:

25. Which of the following constitute Capital Account? 

1. Foreign Loans
2. Foreign Direct Investment
3. Private Remittances
4. Portfolio Investment

Select the correct answer using the codes given below.

(a) 1, 2 and 3

(b) 1, 2 and 4

(c) 2, 3 and 4

(d) 1, 3 and 4

Explanation:

26. Consider the following statements: The price of any currency in international decided by the 

1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question

Which of the statements given above are correct?

(a) 1, 2, 3 and 4

(b) 2 and 3 only

(c) 3 and 4 only

(d) 1 and 4 only

Explanation:

27. Which of the following would include Foreign Direct Investment in India? 

1. Subsidiaries of foreign companies in India
2. Majority foreign equity holding in Indian companies
3. Companies exclusively financed by foreign companies
4. Portfolio investment

Select the correct answer using the codes given below:

(a) 1, 2, 3 and 4

(b) 2 and 4 only

(c) 1 and 3 only

(d) 1, 2 and 3 only

Explanation:

28. Consider the following statements: 

The price of any currency in international market is decided by the

1. World Bank
2. Demand for goods/services provided by the country concerned
3. Stability of the government of the concerned country
4. Economic potential of the country in question.

Select the correct answer using the codes below:

(a) 1, 2, 3 and 4 are correct

(b) 2 and 3 are correct

(c) 3 and 4 are correct

(d) 1 and 4 are correct

Explanation:

29. Consider the following statements:

1. The value of Indo-Sri Lanka trade has consistently increased in the last decade.
2. “Textile and textile articles” constitute an important item of trade between India and Bangladesh.
3. 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?

(a) 1 and 2 only

(b) 2 only

(c) 3 only

(d) 1, 2 and 3

Explanation:

30. Consider, the following statements:

Statement-I: India accounts for 3.2% of global export of goods.

Statement-II: Many local companies and some foreign companies operating in India have taken advantage of India’s ‘Production-linked Incentive’ scheme.

Which one of the following is correct in respect of the above statements?

(a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I

(b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I

(c) Statement-I is correct but Statement-II is incorrect

(d) Statement-I is incorrect but Statement-II is correct

Explanation: