Q. 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:
(a) 1 only
(b) 1 and 2 only
(c) 3 only
(d) 1, 2 and 3
Correct Answer – (a) 1 only
Question from UPSC Prelims 2020 GS Paper
Explanation:
Strategies for Immunity Against Global Financial Crises
1. Not Depending on Short-Term Foreign Borrowings
This is a crucial strategy for any country looking to insulate itself from global financial crises. Short-term foreign borrowings can be highly volatile. In times of global financial stress, foreign investors may quickly withdraw their investments, leading to a sudden shortage of foreign currency, which can exacerbate the crisis for the borrowing country. By not depending heavily on such borrowings, a country can reduce its vulnerability to sudden stops and reversals of capital flows, which are common features of global financial crises.
2. Opening up to More Foreign Banks
While this can have benefits in terms of bringing in more capital and potentially more efficient banking services, it does not necessarily provide immunity against a global financial crisis. In fact, it could increase vulnerability in some cases. Foreign banks may quickly repatriate capital in times of global stress, exacerbating liquidity issues in the domestic market. Therefore, this option does not directly contribute to immunity against a global financial crisis.
3. Maintaining Full Capital Account Convertibility
This means allowing the free exchange of local currency for foreign currency and vice versa without restrictions. While it can encourage foreign investment and economic integration with global markets, full capital account convertibility also increases vulnerability to global financial shocks. It can lead to rapid and large-scale capital outflows during times of global financial stress, destabilizing the domestic financial system.
Therefore, the option that most directly contributes to some level of immunity against a global financial crisis for India is not depending on short-term foreign borrowings. Opening up to more foreign banks and maintaining full capital account convertibility, while having their own merits in certain contexts, do not directly offer protection against a global financial crisis and, in some scenarios, could even increase vulnerability.
