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?
- Not depending on short-term foreign borrowings
- Opening up to more foreign banks
- Maintaining full capital account convertibility
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2020 Prelims]
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
Answer: (a)
Explanation:
- Statement 1 is correct. Short-term debts are debts that need to be repaid within a relatively shorter time frame. If a country like India is not dependent on short-term foreign borrowings, it means that it does not have to worry about repaying these debts in the near future. This can provide a level of immunity during a global financial crisis.
- Statement 2 is not correct. During the global financial crisis, foreign banks often reduce their lending and retreat from cross-border banking activities, including reducing new entry. Hence, opening up foreign banks alone cannot provide immunity to a country during such a crisis.
- Statement 3 is not correct. Capital account convertibility refers to the absence of restrictions on the conversion of domestic currency into foreign currency. However, during an economic crisis or deteriorating fiscal conditions, inflation management, or balance of payments issues, there may be a stoppage or reversal of capital flows. Therefore, capital account convertibility does not necessarily guarantee immunity from economic crises.
