External Sector And Balance Of Payments

**Statement 1 is correct:** Devaluation of a currency means a deliberate downward adjustment of the value of a country's currency relative to another currency. This makes domestic goods cheaper for foreigners (boosting exports) and foreign goods more expensive for domestic consumers (reducing imports). As exports increase and imports decrease, the trade balance improves, which directly helps in reducing the Current Account Deficit (CAD). **Statement 2 is incorrect:** Export subsidies are financial supports provided by the government to domestic exporters to make their products more competitive in the international market. Reduction in the export subsidy would make Indian goods more expensive abroad, leading to a fall in exports. A decline in exports would worsen the trade balance and, consequently, increase the CAD rather than reducing it. **Statement 3 is correct:** While Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) are technically recorded under the Capital Account, they play a crucial role in managing the CAD. Financing the Deficit: In the short term, these inflows provide the necessary foreign exchange to bridge the gap created by the CAD. Structural Improvement: In the long term, FDI (especially in manufacturing) promotes "Import Substitution" and enhances export capacity, which structurally reduces the CAD.

The visit of foreign nationals to India for the XIX Commonwealth Games can be considered as an export in economic terms. This is because when these foreign nationals come to India, they bring foreign currency with them and spend it in India on various goods and services. This spending is equivalent to them buying Indian goods and services, which is why it is considered an export. This falls under the Mode 2 type of service under WTO norms, where consumption of a service happens in the territory of the service provider.

Statement (a) is correct: Balance of Payments (BoP) records all economic transactions (goods, services, capital, transfers) between residents of a country and the rest of the world over a year. Statement (b) is incorrect: This describes only the Balance of Trade, not the full BoP. Statement (c) is incorrect: BoP covers all residents (individuals, firms, institutions), not just governments. Statement (d) is incorrect: Capital account is only one component of BoP; it also includes current account and errors & omissions.

India's foreign-exchange reserves include: **1. Foreign currency assets (FCAs):** This is the largest component, consisting of deposits and holdings in major currencies like US Dollars, Euros, and Yen. **2. Gold reserves:** India holds a significant amount of gold bullion as part of its foreign exchange reserves. **3. Special drawing rights (SDRs):** These are international reserve assets created by the International Monetary Fund (IMF) that supplement official foreign reserves. **4. Reserve position in the IMF:** This refers to India's quota or shareholding position in the IMF, which can be a source of additional foreign currency if needed.

**1. Foreign Loans –** These are borrowings from abroad by the government or private sector. They are capital inflows and part of the Capital Account. **2. Foreign Direct Investment (FDI) –** Investment by foreign entities in domestic companies, creating a long-term interest in the economy, is part of the Capital Account. **3. Private Remittances –** These are funds sent by individuals (like migrant workers) to their home country. They are part of the Current Account, not the Capital Account. **4. Portfolio Investment –** Investments in stocks, bonds, and other financial assets by foreigners in the domestic market are capital inflows, part of the Capital Account.

**Statement A is correct:** The balance of payment records the transaction in goods, services, and assets between residents (and not governments) of one country with the rest of the world.  **Statement B is incorrect:** This describes only the Balance of Trade, not the full BoP. **Statement C is incorrect:** BoP covers all residents (individuals, firms, institutions), not just governments. **Statement D is incorrect:** Capital account is only one component of BoP; it also includes current account and errors & omissions.

**Balance of Trade:** This refers to the net difference between a country's exports and imports of goods. It's a key component of the current account. **Foreign Assets:** This refers to assets held by a country's residents outside the country. It's not part of the current account but might be included in the capital account. **Balance of Invisibles:** This captures the net income from services, such as tourism, transportation, and royalties, as well as net current transfers (e.g., foreign aid). It's another crucial component of the current account. **Special Drawing Right (SDR):** This is an international reserve asset created by the International Monetary Fund (IMF). It's not directly part of the current account but might be included in the reserve assets. Therefore, only options 1 (Balance of Trade) and 3 (Balance of Invisibles) are constituents of the Current Account in the Balance of Payments.

The correct answer is (C) dollars and other hard currencies **International Liquidity:** This refers to a country's ability to meet its short-term external obligations (payments for imports, debt servicing, etc.) It essentially reflects the ease with which a country can access foreign currencies needed for international transactions. **Focus on Hard Currencies:** While some transactions might involve other currencies, international reserves are predominantly held in major reserve currencies like the US Dollar, Euro, Japanese Yen, and British Pound. These currencies are considered "hard" because they are stable, widely traded, and liquid (easily convertible into other currencies).

**Statement 1 is correct:** This is the primary objective of the Gold Monetization Scheme (GMS). The scheme encourages individuals and institutions to deposit their idle physical gold (jewellery, coins, bars) with banks. This gold is then melted, assayed, and added to the country's gold reserves, which can be lent to jewellers, thereby bringing it into the formal economy. **Statement 2 is incorrect:** These schemes are focused on managing domestic gold supply and demand. They are not designed to attract Foreign Direct Investment (FDI). Policies related to FDI in the jewellery sector are separate from these schemes. **Statement 3 is correct:** This is a core objective of both schemes. * The Sovereign Gold Bond (SGB) Scheme provides a financial alternative to buying physical gold. By shifting demand from physical gold to paper gold, it helps reduce the demand for gold imports. * The Gold Monetization Scheme (GMS) increases the domestic supply of recycled gold available to jewellers, thus reducing their reliance on imported gold. Both schemes aim to curb gold imports, which are a major component of India's import bill and contribute significantly to the Current Account Deficit (CAD).

The term "import cover" refers to the number of months a country's foreign exchange reserves can finance its imports. It's a crucial indicator of a country's external trade stability and its ability to meet its import obligations.

* **Statement I is correct** In 2021, Switzerland exported $86.7B in Gold, making it the 1st largest exporter of Gold in the world. Switzerland is consistently the world's leading gold-exporting country based on value. (**Please note: The list is dynamic & keeps varying yearly**) * **Statement II is not correct.** The United States is way out in front as the country with the largest gold reserves in the world at 8,000 tonnes (as of 2024). * In India, the largest resources of gold ore (primary) are located in Bihar (44%) followed by Rajasthan (25%), Karnataka (21%), West Bengal (3%), Andhra Pradesh (3% ), Jharkhand (2 %). The remaining 2% resources of ore are located in Chhattisgarh, Madhya Pradesh, Kerala, Maharashtra and Tamil Nadu. (PIB 2021) * India is one of the largest gold importers, sourcing 800-1,000 tons annually, mainly from Switzerland, the UAE, and South Africa. Imports are driven by high domestic demand for jewelry and investment. Gold exports, primarily in jewelry, target the US, UAE, and Hong Kong, supporting India's trade through its jewelry manufacturing sector.