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:
Explanation
A currency crisis occurs when a country experiences a rapid depreciation of its domestic currency accompanied by capital flight and depleting foreign exchange reserves:
– 1. Foreign currency earnings of IT sector (Reduces risk): Software service exports generate robust, steady foreign currency inflows (inward remittances in US dollars), bolstering foreign exchange reserves and cushioning the Current Account Deficit (CAD).
– 3. Remittances from Indians abroad (Reduces risk): India is one of the highest recipients of inward private remittances globally; these non-debt-creating foreign currency transfers directly improve the balance of payments.
– 2. Increasing government expenditure (Increases or does not reduce risk): Unbridled public spending widens the fiscal deficit, exacerbates domestic inflation, and can trigger capital flight, increasing the risk of currency depreciation.
Hence, factors 1 and 3 reduce the risk — Option B.