20. What may count as foreign direct investment:
(1) a foreign company establishing a subsidiary;
(2) buying a majority stake in an existing Indian company;
(3) a wholly foreign-financed company;
(4) buying shares solely as portfolio investment?
[UPSC CSE Prelims, GS Paper I — 2012]
(A) 1 and 2 only
(B) 2 and 3 only
(C) 1, 3 and 4 only
(D) 1, 2 and 3 only
Answer: (D) 1, 2 and 3 only
Explanation: FDI involves a lasting foreign ownership interest and influence over an enterprise. Creating a subsidiary, acquiring control and establishing a foreign-funded company fit that concept. A purely passive portfolio purchase does not automatically constitute direct investment.
19. Spending by foreign visitors attending the Commonwealth Games in India is treated as which item in India’s balance of payments?
[UPSC CSE Prelims, GS Paper I — 2011]
(A) Exports
(B) Imports
(C) Domestic production only
(D) Domestic consumption only
Answer: (A) Exports
Explanation: Foreign visitors’ purchases of accommodation, food and travel services in India represent exports of services, even though customers physically enter India. In balance-of-payments accounting, residency rather than the location of the buyer determines cross-border service treatment.
18. Which measures could help India reduce external-account pressure:
(1) devalue the rupee;
(2) cut export subsidies;
(3) attract FDI and portfolio investment?
[UPSC CSE Prelims, GS Paper I — 2011]
(A) 1 and 2 only
(B) 2 and 3 only
(C) 3 only
(D) 1 and 3 only
Answer: (D) 1 and 3 only
Explanation: A weaker currency can improve export competitiveness, while foreign capital inflows ease external financing needs. Cutting export support does not normally promote exports. A current-account deficit and the capital needed to finance it must nevertheless be distinguished analytically.
17. Which statement about IMF lending is correct?
[UPSC CSE Prelims, GS Paper I — 2011]
(A) It can lend to any country
(B) It lends only to developed countries
(C) It lends only to its member countries
(D) It lends solely to member central banks
Answer: (C) It lends only to its member countries
Explanation: The IMF extends financial assistance through arrangements with member states facing eligible external-payment and macroeconomic needs. Its membership framework distinguishes IMF financing from private international credit. Low-income and advanced economies may both qualify for different facilities.
16. Which best distinguishes FDI from foreign institutional investment?
[UPSC CSE Prelims, GS Paper I — 2011]
(A) Institutional portfolio investors transfer more management technology than direct investors
(B) Portfolio investment broadens market capital, while FDI commonly targets a lasting investment in specific enterprises
(C) FDI occurs only in secondary markets
(D) Institutional portfolio investment is always more stable
Answer: (B) Portfolio investment broadens market capital, while FDI commonly targets a lasting investment in specific enterprises
Explanation: FDI generally entails a lasting ownership interest and potential managerial influence over a business. Foreign institutional portfolio investment primarily holds tradable securities, widening market funding but remaining more liquid and potentially more sensitive to changes in investor sentiment.
15. The International Development Association is administered jointly with which institution?
[UPSC CSE Prelims, GS Paper I — 2010]
(A) International Bank for Reconstruction and Development
(B) International Fund for Agricultural Development
(C) United Nations Development Programme
(D) United Nations Industrial Development Organization
Answer: (A) International Bank for Reconstruction and Development
Explanation: IDA forms the concessional lending arm of the World Bank alongside IBRD. Both share staff and many operational processes, but IDA emphasises grants and favourable credits to poorer countries. IFAD is a separate rural-development institution.
14. Assertion: The balance of payments offers a fuller picture of external transactions than the balance of trade.
Reason: It includes visible and invisible transactions, whereas the balance of trade covers goods.
[UPSC CSE Prelims, GS Paper I — 2006]
(A) Both true, and the reason explains the assertion
(B) Both true, but the reason does not explain it
(C) Assertion true, reason false
(D) Assertion false, reason true
Answer: (A) Both true, and the reason explains the assertion
Explanation: The balance of trade measures exports minus imports of merchandise. The balance of payments is a broader accounting statement, including services, income, transfers and financial movements. That wider scope directly explains why it better represents external economic relations.
13. Which are implied by full rupee convertibility:
(1) free exchange with foreign currencies;
(2) direct exchange at authorised places domestically or abroad;
(3) functioning like other fully convertible international currencies?
[UPSC CSE Prelims, GS Paper I — 2002]
(A) 1 and 2 only
(B) 1 and 3 only
(C) 2 and 3 only
(D) 1, 2 and 3
Answer: (D) 1, 2 and 3
Explanation: Full convertibility means freedom to exchange the rupee across current and capital transactions, subject to the definition used in the historical question. The concept should be distinguished from a specific fixed or floating exchange-rate target and from actual global reserve-currency status.
12. Assertion: Foreign-exchange ceilings for several current-account transactions were relaxed in 2000.
Reason: India’s foreign-currency assets had fallen.
Which is correct?
[UPSC CSE Prelims, GS Paper I — 2001]
(A) Both true, and the reason explains the assertion
(B) Both true, but the reason does not explain it
(C) Assertion true, reason false
(D) Assertion false, reason true
Answer: (C) Assertion true, reason false
Explanation: The policy changes under foreign-exchange liberalisation eased limits on permitted current-account uses. The accompanying reason is false because India’s foreign-currency reserves were not falling in the way asserted. Liberalisation followed reform objectives rather than the alleged reserve decline.
11. In India, full convertibility of the rupee in the late 1990s applied to which account?
[UPSC CSE Prelims, GS Paper I — 2000]
(A) Current account only
(B) Capital account only
(C) Current and capital accounts
(D) Gold account only
Answer: (A) Current account only
Explanation: India accepted current-account convertibility under IMF Article VIII in 1994, permitting ordinary international trade and payment transactions. Capital-account transactions remained subject to restrictions. Full capital-account convertibility requires a separate policy choice and is not implied by current-account openness.
