In the context of India, which of the following factors is/are contributor/contributors to reducing the risk of a currency crisis?

1. The foreign currency earnings of India’s IT sector

2. Increasing the government expenditure

3. Remittances from Indians abroad

Select the correct answer using the code given below:

The correct answer is 1 and 3 only.

A currency crisis occurs when a country experiences a sudden and sharp devaluation of its currency, often accompanied by a rapid decline in foreign exchange (forex) reserves. In the context of India, factors that increase foreign exchange inflows help strengthen foreign exchange reserves, thereby mitigating or reducing the risk of a currency crisis.

Let's analyze each of the given statements step-by-step:

1. The foreign currency earnings of India’s IT sector:
India's IT sector is a major exporter of services. When IT companies earn revenue in foreign currencies (like USD), these earnings flow into India and convert to Indian Rupees (INR). This increases the inflow of foreign exchange into the economy, boosts India's foreign exchange reserves, and increases the demand for the Indian Rupee. Consequently, it helps protect against a currency crisis. Thus, Statement 1 is correct.

2. Increasing the government expenditure:
An increase in government expenditure, especially without a corresponding increase in revenue, generally leads to a higher fiscal deficit. Higher government spending can raise domestic demand and inflation, which increases the country's import bill and widens the Current Account Deficit (CAD). Moreover, higher domestic inflation makes domestic goods less competitive, exerting depreciating pressure on the currency. Therefore, increasing government expenditure increases financial risk rather than reducing the risk of a currency crisis. Thus, Statement 2 is incorrect.

3. Remittances from Indians abroad:
Remittances are foreign currency funds sent home by non-resident Indians (NRIs) working overseas. These inflows are a major source of current account transfers for India. High remittance inflows directly augment foreign exchange reserves and help offset trade deficits, stabilizing the Indian Rupee and significantly reducing the risk of a currency crisis. Thus, Statement 3 is correct.

Conclusion:
Since statements 1 and 3 reduce the risk of a currency crisis, the correct code selection is 1 and 3 only.