External Sector — UPSC Prelims Economy previous year questions

Statement I is correct. The IBRD gives loans, guarantees and advice to middle-income countries and creditworthy low-income countries.
Statement II is incorrect. The IBRD does not work single-handedly. It works within the World Bank Group, with the IDA and other partners.
Statement III is correct. The IBRD was set up in 1944 mainly to help rebuild Europe after World War II.
So I and III are correct.
Remember: The IDA gives concessional loans and grants to the poorest countries.

Source: World Bank Group; IBRD Articles of Agreement (1944)

Statement 1 is correct. India is a member of the International Grains Council (IGC). The IGC is an inter-governmental body that shares market information on grains under the Grains Trade Convention.
Statement 2 is incorrect. No country needs IGC membership to export or import rice or wheat. Trade is governed by the importing and exporting countries' own policies and WTO rules.
So only statement 1 is correct.
Remember: the IGC is based in London.

Source: International Grains Council, Grains Trade Convention, 1995; Ministry of Commerce

Statement-I is incorrect. India does import apples from the United States. In 2023 India removed the extra retaliatory duty on US apples, which made imports easier.
Statement-II is correct. The Food Safety and Standards Act and the Environment Protection Act need prior approval for GM food imports. In India, the Genetic Engineering Appraisal Committee (GEAC) gives this approval.
So only Statement-II is correct.
Remember: GEAC works under the Ministry of Environment, Forest and Climate Change.

Source: Food Safety and Standards Act, 2006; Environment (Protection) Act, 1986; Ministry of Commerce notification on US goods (2023)

The Rapid Financing Instrument (RFI) gives quick financial help to any IMF member with an urgent balance of payments need.
The Rapid Credit Facility (RCF) gives quick, low-interest help to low-income members. It works under the Poverty Reduction and Growth Trust.
Both are IMF lending windows.
The Asian Development Bank, UNEP FI and the World Bank do not offer these two facilities.

Source: IMF factsheets on the Rapid Financing Instrument and Rapid Credit Facility

Statement 1 is correct. NEER is a weighted average of the rupee against a basket of currencies. A rise means the rupee has strengthened.
Statement 2 is incorrect. REER adjusts NEER for relative prices. A rise in REER means exports become costlier, so competitiveness falls.
Statement 3 is correct. Higher domestic inflation lowers REER relative to NEER, so the two move apart.
Remember: A fall in REER means better competitiveness.

Source: RBI, Reserve Bank of India Bulletin on NEER and REER indices

Statement 1 is correct. The G20 agreed on the Common Framework in November 2020. The Paris Club works with the G20 in it.
Statement 2 is correct. It helps poor countries that have unsustainable debt to restructure it in a coordinated way.
Both statements are correct.
Remember: It covers countries eligible for the IMF-World Bank Debt Service Suspension Initiative.

Source: G20 Communique on Common Framework for Debt Treatments beyond the DSSI (Nov 2020); IMF/World Bank notes

FCCBs and GDRs are routes for foreign equity investment in Indian companies. They count as FDI.
Foreign institutional investment is counted as FDI when it meets conditions such as a stake of 10% or more.
Non-resident external deposits are bank deposits. They are banking capital, not FDI.
So 1, 2 and 3 are included.
Remember: FDI means a lasting interest, usually 10% or more of equity.

Source: Previous year paper; answer key cross-checked against published sources

Statement 1 is correct. After devaluation, domestic goods become cheaper for foreign buyers.
Statement 2 is incorrect. Devaluation lowers the foreign value of the domestic currency.
Statement 3 is incorrect. The trade balance improves only if export and import demand are elastic enough. This is the Marshall-Lerner condition, so it is not certain.
Remember: Devaluation is a deliberate cut in a currency's value under a fixed exchange rate system.

Source: Standard International Economics texts (Marshall-Lerner condition); RBI

Statement 1 is correct. Short-term foreign debt must be repaid quickly. In a crisis, lenders refuse to roll it over. Avoiding it reduces risk.
Statement 2 is incorrect. Foreign banks may pull funds back home during a global crisis. This spreads the shock.
Statement 3 is incorrect. Full capital account convertibility lets capital leave freely. This raises the risk of sudden outflows.

Source: RBI; NCERT Class XII, Introductory Macroeconomics, Ch. 6

Each IMF member pays a quota. Up to 25 per cent was paid earlier in gold, and now in reserve assets or major currencies.
This portion is called the reserve tranche or gold tranche.
The member can draw it from the IMF without conditions and without paying interest.
It is not a World Bank, WTO or central bank facility.

Source: IMF factsheet on quotas and reserve tranche position

Statement 1 is correct. TRIMS bans local-content and trade-balancing rules that need quantitative limits on imports.
Statement 2 is incorrect. TRIMS applies only to investment measures that affect trade in goods.
Statement 3 is correct. TRIMS does not regulate foreign investment itself. It only restricts measures that distort trade.
So statements 1 and 3 are correct.

Source: WTO Agreement on Trade-Related Investment Measures (TRIMs)

Statement 1 is correct. Low short-term foreign debt reduces the risk of a sudden outflow when investors panic.
Statement 2 is incorrect. More foreign banks do not give protection against an external shock.
Statement 3 is incorrect. Full capital account convertibility makes a country more open to sudden capital flight.
So only statement 1 is correct.

Source: RBI, Report of the Committee on Capital Account Convertibility; Economic Survey

Curbing imports and promoting exports narrows the trade deficit and supports the rupee.
Masala Bonds and easier ECB bring in foreign currency and support the rupee.
An expansionary monetary policy lowers interest rates.
Lower rates make Indian assets less attractive and cause capital outflow.
This weakens the rupee further.
Remember: tight money helps a falling currency; loose money hurts it.

Source: RBI, Report on Currency and Finance; RBI ECB Master Direction

Statement 1 is incorrect. Most of India's external debt is owed by non-government entities such as commercial borrowers and NRI deposits. Government debt is a smaller share.
Statement 2 is incorrect. The debt is held in several currencies, such as the US dollar, rupee, yen, SDR and euro. The US dollar has the largest share but not all of it.
So neither statement is correct.

Source: Ministry of Finance, India's External Debt: A Status Report

Statement 1 is correct. IT exports bring in foreign currency and support the current account.
Statement 2 is incorrect. Higher government spending raises the fiscal deficit and can add to inflation and imports. It does not reduce the risk of a crisis.
Statement 3 is correct. Remittances are a steady source of foreign exchange.
So statements 1 and 3 are correct.

Source: RBI, Handbook of Statistics on the Indian Economy (BoP); Economic Survey

Statement 1 is correct. The IMFC is the advisory committee of the IMF Board of Governors. It reviews global economic matters and advises the IMF.
Statement 2 is correct. The World Bank, the WTO, the BIS, the UN and other bodies attend as observers.
Both statements are correct.
Remember: The IMFC has 24 members drawn from the Governors.

Source: IMF factsheet on the International Monetary and Financial Committee

Statement 1 is incorrect. The World Bank does not fix exchange rates.
Statement 2 is correct. Demand for a country's goods and services creates demand for its currency.
Statement 3 is correct. A stable government attracts investment and supports the currency.
Statement 4 is treated as incorrect in the UPSC key, although economic strength does influence currency value in general.
The key is 2 and 3 only.
Remember: the official answer key for this question is option (b).

Source: UPSC CSE Prelims 2012 GS Paper I; standard economics texts on exchange-rate determination

Devaluation lowers the foreign-currency price of a country's goods.
Foreign buyers then find them cheaper, so exports may rise.
Thus A is true, R is true, and R explains A.
Remember: devaluation also makes imports costlier.

Source: Standard international economics; RBI, exchange rate policy

Liberalization after 1991 cut tariffs on imported capital goods. So A is true.
Cheaper imported machines let local firms adopt better technology and compete globally. So R is true and it explains A.
The other options deny either the truth of the statements or the link.
Remember: 1991 reforms are grouped as liberalization, privatization and globalization.

Source: Economic Survey

The WTO generally bans quantitative restrictions on trade, so A matches 2.
The IMF lends to correct balance of payments problems, so B matches 1.
SAARC promotes cooperation among South Asian countries, so C matches 4.
The IDA gives soft loans, so D matches 3.
The code is 2, 1, 4, 3.

Source: GATT 1994 Article XI; IMF Articles of Agreement; SAARC Charter; World Bank IDA