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?

(1) Not depending on short-term foreign borrowings
(2) Opening up to more foreign banks
(3) Maintaining full capital account convertibility

Select the correct answer using the code given below :

  • 1 only
  • 1 and 2 only
  • 3 only
  • 1, 2 and 3

Answer: (a) 1 only

Notes:
  • Both international creditors and the debtor nations suffer significant hardships due to a global financial crisis and are forced into default.
    • Both economic and political considerations leave it difficult to resist coming to the aid of a distressed nation or region.
    • So, India should not depend on short-term foreign borrowings. It will surely provide immunity to India.
  • Opening up to More Foreign Banks 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.
    • The financial crisis will most likely increase the NPA (Non-performing Assets) burden on banks making the banks inefficient in NPA recovery and declaring themselves insolvent in near future.
    • So, opening up to more foreign banks would be a huge risk for India.
  • Capital account convertibility means the freedom to conduct investment transactions without any constraints.
    • Typically, it would mean no restrictions on the amount you can convert into foreign currency to enable you to acquire any foreign asset and vice versa.
    • 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.
    • During a financial crisis, it will be a huge failure and mistake.