UPSC Prelims 2016 · Question 43 of 98
UPSC Prelims 2016 question on Import Cover
- ExamUPSC CSE
- Year2016
- PaperGeneral Studies Paper I
- SubjectIndian Economy
- TopicExternal Sector of India
- DifficultyMedium
- TypeDirect
Which of the following best describes the term ‘import cover’, sometimes seen in the news?
Show answer
Answer: D. It is the number of months of imports that could be paid for by a country’s international reserves
Verdict
The answer is the number of months of imports that could be paid for by a country's international reserves.
Analysis
Import cover measures how long a country could continue paying for its imports out of its foreign exchange reserves, and it is a standard indicator of external stability. During the currency pressure of 2013, when reserves fell to around 275 billion dollars, India's import cover dipped to roughly seven months, and by the period of this question it had risen well above that. The other options describe an imports to GDP ratio, the absolute value of imports, and a bilateral trade balance, none of which involves reserves.
Source
The Hindu report on import cover rising, citing Reserve Bank data.
How to crack it
The word cover in finance always means the extent to which a buffer can absorb a demand, as in interest cover or insurance cover, so it must be a ratio of a stock to a flow expressed in time. That structural reading eliminates the three options which are ratios of flows to flows. Whenever a technical term uses a common financial noun, apply the general meaning of that noun before reaching for a definition, since economic vocabulary is largely compositional.