Directions for the following 5 (Five) items:
Read the following Two passages and answer the items that follow. Your answers to these items should be based on the passages only.

Passage-1

India’s Balance of Payments (BoP) evolved reflecting both the changes in our development paradigm and exogenous shocks from time to time. The 1991 crisis was preceded by growing BoP vulnerabilities in the 1980s when the Gulf War led to a sharp increase in the oil prices. On top of that, a slowdown in world trade following the recessionary conditions in industrialised countries and the economic disruption in Eastern Europe including the erstwhile USSR had begun to affect India's exports. A large number of Indian workers employed in Kuwait had to be airlifted to India and their remittances stopped. Foreign exchange reserves had already dwindled due to significant drawdown for financing of Current Account Deficit (CAD) in earlier years. During 1990-91, at one point of time, the foreign currency assets had dipped below US$ 1.0 billion, covering barely two weeks of imports. With increasing recourse to the borrowings on commercial terms in the previous years, financing of CAD had also become more sensitive to creditors’ confidence in the Indian economy.

Based on the above passage, the following assumptions have been made:

1. The Indian economy had no other significant sources of foreign exchange earnings that could offset the need for commercial borrowings previous to the 1991 crisis.
2. All developing countries with significant Current Account Deficits in the 1980s faced a major BoP crisis by 1991.

Which of the assumptions given above is/are valid?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Question

Directions for the following 5 (Five) items:
Read the following Two passages and answer the items that follow. Your answers to these items should be based on the passages only.

Passage-1

India&rsquo;s Balance of Payments (BoP) evolved reflecting both the changes in our development paradigm and exogenous shocks from time to time. The 1991 crisis was preceded by growing BoP vulnerabilities in the 1980s when the Gulf War led to a sharp increase in the oil prices. On top of that, a slowdown in world trade following the recessionary conditions in industrialised countries and the economic disruption in Eastern Europe including the erstwhile USSR had begun to affect India's exports. A large number of Indian workers employed in Kuwait had to be airlifted to India and their remittances stopped. Foreign exchange reserves had already dwindled due to significant drawdown for financing of Current Account Deficit (CAD) in earlier years. During 1990-91, at one point of time, the foreign currency assets had dipped below US$ 1.0 billion, covering barely two weeks of imports. With increasing recourse to the borrowings on commercial terms in the previous years, financing of CAD had also become more sensitive to creditors&rsquo; confidence in the Indian economy.

Based on the above passage, the following assumptions have been made:

1. The Indian economy had no other significant sources of foreign exchange earnings that could offset the need for commercial borrowings previous to the 1991 crisis.
2. All developing countries with significant Current Account Deficits in the 1980s faced a major BoP crisis by 1991.

Which of the assumptions given above is/are valid?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

TutorArc · Accepted Answer

Statement 1 is not correct: The passage mentions exports and remittances as sources of foreign exchange because of the large number of Indian workers employed in the Gulf. The issue is that remittances were negatively impacted, and reserves dwindled, because due to economic disruption and the Gulf war, these Indian workers were airlifted to India and their remittances stopped. This led to increased recourse to commercial borrowing. It can not be assumed that there was absence of other sources of foreign exchange earnings entirely.

Statement 2 is not correct: The passage discusses India's specific situation. It doesn't make such a universal claim to make an assumption that all developing countries with CADs in the 1980s faced such a crisis, as specific contexts and policy responses vary.

Balance of Payments

Impact of External Factors on Balance of Payments

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M Question 1	⏱ 0
Directions for the following 5 (Five) items: Read the following Two passages and answer the items that follow. Your answers to these items should be based on the passages only. Passage-1 India’s Balance of Payments (BoP) evolved reflecting both the changes in our development paradigm and exogenous shocks from time to time. The 1991 crisis was preceded by growing BoP vulnerabilities in the 1980s when the Gulf War led to a sharp increase in the oil prices. On top of that, a slowdown in world trade following the recessionary conditions in industrialised countries and the economic disruption in Eastern Europe including the erstwhile USSR had begun to affect India's exports. A large number of Indian workers employed in Kuwait had to be airlifted to India and their remittances stopped. Foreign exchange reserves had already dwindled due to significant drawdown for financing of Current Account Deficit (CAD) in earlier years. During 1990-91, at one point of time, the foreign currency assets had dipped below US$ 1.0 billion, covering barely two weeks of imports. With increasing recourse to the borrowings on commercial terms in the previous years, financing of CAD had also become more sensitive to creditors’ confidence in the Indian economy. Based on the above passage, the following assumptions have been made: 1. The Indian economy had no other significant sources of foreign exchange earnings that could offset the need for commercial borrowings previous to the 1991 crisis. 2. All developing countries with significant Current Account Deficits in the 1980s faced a major BoP crisis by 1991. Which of the assumptions given above is/are valid? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

Balance of Payments

Impact of External Factors on Balance of Payments

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