If another global financial crisis happens in the near future, which of the following action/policie

Q: What is UPSC Prelims?

UPSC Prelims is a competitive examination conducted in India. This question is from the 2020 UPSC Prelims Economy paper.

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This UPSC Prelims 2020 Economy question has a medium difficulty level and is marked as an important question.

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Question

If another global financial crisis happens in the near future, which of the following action/policies are most likely to give some immunity to India?Not depending on short-term foreign borrowingsOpening up to more foreign banksMaintaining full capital account convertibilitySelect the correct answer using the code given below:

Accepted Answer

Correct Answer: A — 1 onlyStep-by-step Solution:Statement 1 — Not depending on short‑term foreign borrowings: Correct. Short‑term debt can lead to rollover risk and sudden capital flight during a crisis. Lower dependence reduces vulnerability. ✓Statement 2 — Opening up to more foreign banks: Incorrect. More foreign bank presence increases exposure to global financial shocks, as foreign banks may cut credit during a crisis (contagion). ✗Statement 3 — Maintaining full capital account convertibility: Incorrect. Full convertibility allows unrestricted capital outflows, which can cause rapid capital flight and currency depreciation during a crisis, worsening the situation. ✗Why other options are incorrect:Option B (1 and 2 only): Statement 2 is harmful, not immunity‑giving.Option C (3 only): Full convertibility is risky; India has partial convertibility with controls.Option D (1,2,3): Statements 2 and 3 are not immunity‑giving.Key Concept: India learned from the 1991 BOP crisis and 2008 global financial crisis. Prudent policies include: manageable current account deficit, adequate foreign exchange reserves, calibrated capital account convertibility (Tarapore Committee), and limited short‑term external debt. RBI’s macroprudential measures help insulate the economy from external shocks.

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