Consider the following statements:Most of India's external debt is owed by governmental entities.All

Q: What is UPSC Prelims?

UPSC Prelims is a competitive examination conducted in India. This question is from the 2019 UPSC Prelims Economy paper.

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To prepare for UPSC Prelims Economy, practice previous year questions (PYQs), understand concepts thoroughly, and solve mock tests regularly. This 2019 question covers Balance of Payment, Current Account & Trade Deficit topic.

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This UPSC Prelims 2019 Economy question has a medium difficulty level and is marked as an important question.

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Question

Consider the following statements:Most of India's external debt is owed by governmental entities.All of India's external debt is denominated in US dollars.Which of the statements given above is/are correct?

Accepted Answer

Correct Answer: D — Neither 1 nor 2Step-by-step Solution:Statement 1 — Most of India's external debt is owed by governmental entities: This is incorrect. As per the Government's External Debt report (December 2018): Commercial borrowings (by non-governmental entities — corporates, banks) constituted the largest component at 37.1% of total external debt. NRI deposits accounted for 23.9%, and short-term trade credit for 19.9%. Government (sovereign) borrowings from multilateral/bilateral sources form a smaller share. So the majority of India's external debt is NOT owed by governmental entities — it is owed by private/commercial entities. ✗Statement 2 — All of India's external debt is denominated in US dollars: This is incorrect. While US dollar-denominated debt is the largest component (45.9% share at end-December 2018), India's external debt is denominated in multiple currencies: Indian Rupee (24.8%), SDR/Special Drawing Rights (5.1%), Japanese Yen (4.9%), Euro (3.1%), and other currencies. Not all of it is in US dollars. ✗Why other options are incorrect:Options A, B, and C: Incorrect because both statements are factually wrong.Key Concept: India's external debt composition: Commercial borrowings (ECBs by corporates) — largest component (~37%); NRI deposits (FCNR-B, NRE accounts) — ~24%; Short-term trade credit — ~20%; Multilateral/bilateral government borrowings (World Bank, ADB, bilateral aid) — smaller share. Currency composition: USD (~46%), Indian Rupee (~25%), SDR (~5%), Yen (~5%), Euro (~3%), others. Currency risk: Borrowing in foreign currencies creates currency risk when the rupee depreciates — this is why ECBs (External Commercial Borrowings) policy requires monitoring of currency exposure by corporates.

Consider the following statements:Most of India's external debt is owed by governmental entities.All of India's external debt is denominated in US dollars.Which of the statements given above is/are correct?

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Consider the following statements:Most of India's external debt is owed by governmental entities.All of India's external debt is denominated in US dollars.Which of the statements given above is/are correct?

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More Questions from Balance of Payment, Current Account & Trade Deficit

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