External sector and international economic institutions: previous-year questions
62 real UPSC Prelims questions (2011–2026) with the official answer and a clear explanation. 20 of them came in the last five papers.
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Questions per year, counted from the official papers.
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India is one of the founding members of the International North-South Transport Corridor (INSTC), a multimodal transportation corridor, which will connect
Answer (a) & explanation
INSTC links India to Central Asia and Europe via Iran (a). The International North–South Transport Corridor was agreed in 2000 by India, Iran and Russia. Goods go by sea from Mumbai to Bandar Abbas or Chabahar in Iran, then by road and rail through Iran, the Caspian region and Central Asia to Russia and on to Europe. Option (b) is wrong: it does not pass through China. Option (c) is wrong: that describes routes like the Trilateral Highway. Option (d) is wrong: Azerbaijan is one route inside the corridor, not its whole.
Notice its value: it is shorter and cheaper than the Suez route. India runs a terminal at Chabahar under a 10-year deal (2024). The IMEC corridor via the Gulf is another route.
option (d) names a real transit country. The full path in (a), via Iran, is the defining one.
Answer as per the official UPSC answer key.
Consider the following statements in respect of the International Bank for Reconstruction and Development (IBRD) :
- I. It provides loans and guarantees to middle income countries.
- II. It works single-handedly to help developing countries to reduce poverty.
- III. It was established to help Europe rebuild after the World War II.
Which of the statements given above are correct?
Answer (c) & explanation
Statements I and III are correct (c). Statement III is right: the IBRD, set up at Bretton Woods in 1944, was meant to rebuild war-torn Europe; its first loan went to France in 1947. Statement I is right: today it gives loans and guarantees to middle-income and creditworthy poorer countries. Statement II is wrong: it works with the IDA, IFC, MIGA and ICSID as the World Bank Group, so "single-handedly" is wrong.
Notice the split: the IDA gives soft loans and grants to the poorest countries, the IFC lends to the private sector, and MIGA gives risk insurance. India is one of the IBRD's largest borrowers, and is not a member of ICSID. The World Bank's twin is the IMF.
"single-handedly". A Bank with four sister bodies does not work alone.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.
Statement-II :
The USA Government debt is not backed by any hard assets, but only by the faith of the Government.
Which one of the following is correct in respect of the above statements ?
Answer (a) & explanation
Both statements are correct and Statement II explains Statement I (a). Statement II is right: US Treasury bonds are backed only by the "full faith and credit" of the US government, not by gold, land or any other hard asset. Statement I follows from it: there is no collateral a bondholder could seize, and a sovereign cannot be taken to court and forced to pay like a private borrower. So in a default, holders would have no asset to enforce their claim against. Options (b), (c) and (d) wrongly break this cause-and-effect link.
Notice the wider idea: most modern government debt and fiat money rest on trust, not on gold. That is why fights over the US debt ceiling shake world markets, and why rating agencies watch them closely.
it feels as if a bondholder can always "claim" payment. A claim needs something to enforce it against; sovereign debt has only trust behind it.
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Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
India does not import apples from the United States of America.
Statement-II :
In India, the law prohibits the import of Genetically Modified food without the approval of the competent authority.
Which one of the following is correct in respect of the above statements ?
Answer (d) & explanation
Statement I is wrong, Statement II is right (d). Statement II is right: under the Food Safety and Standards Act, 2006, no genetically modified food may be imported or sold without the approval of the FSSAI. Statement I is wrong: India does import Washington apples from the USA. In 2023, India even removed the extra retaliatory duty on US apples after settling disputes at the WTO. So options (a), (b) and (c) fail.
Notice India's GM picture: Bt cotton is the only GM crop grown commercially; GM mustard (DMH-11) got environmental release approval but is stuck in court. The Genetic Engineering Appraisal Committee (GEAC) clears GM crops. India's main apple-growing states are Jammu and Kashmir and Himachal Pradesh.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
Recently, Venezuela has achieved a rapid recovery from its economic crisis and succeeded in preventing its people from fleeing/emigrating to other countries.
Statement-II :
Venezuela has the world's largest oil reserves.
Which one of the following is correct in respect of the above statements ?
Answer (d) & explanation
Statement I is wrong, Statement II is right (d). Statement II is right: Venezuela holds the world's largest proven oil reserves, about 300 billion barrels, ahead of Saudi Arabia. Most of it is heavy crude in the Orinoco Belt. Statement I is wrong: years of hyperinflation, falling output, mismanagement and US sanctions led over seven million people to leave the country. There was no rapid recovery, so options (a), (b) and (c) fail.
Notice the lesson: big reserves did not save the economy, a case of the "resource curse". India's Reliance and ONGC Videsh have dealt in Venezuelan crude. Venezuela is a founder member of OPEC, set up in 1960.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
Recently, the United States of America (USA) and the European Union (EU) have launched the 'Trade and Technology Council'.
Statement-II :
The USA and the EU claim that through this they are trying to bring technological progress and physical productivity under their control.
Which one of the following is correct in respect of the above statements?
Answer (c) & explanation
Statement I is correct but Statement II is wrong (c). Statement I is right: the EU–US Trade and Technology Council was launched in June 2021 to coordinate on trade, supply chains, semiconductors and technology standards, based on shared democratic values. Statement II is wrong: its stated goals are cooperation and common rules, such as on artificial intelligence, not "control" over technological progress and productivity.
Notice that India and the EU set up their own Trade and Technology Council, announced in 2022 and launched in 2023, the EU's second after the USA and India's first such body with any partner. It has working groups on strategic technologies, clean energy and resilient supply chains. India and the EU also concluded their long-pending free trade talks.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
India accounts for 3.2% of global export of goods.
Statement-II :
Many local companies and some foreign companies operating in India have taken advantage of India's 'Production-linked Incentive' scheme.
Which one of the following is correct in respect of the above statements?
Answer (d) & explanation
Statement I is wrong but Statement II is correct (d). Statement I is wrong: India's share of world merchandise exports is only about 1.8%, not 3.2%. Its share of services exports is much higher, over 4%, led by IT and business services. Statement II is right: the Production-Linked Incentive scheme (2020) covers 14 sectors, such as mobile phones, pharmaceuticals, solar modules and automobiles, and has drawn both Indian firms and foreign ones such as Apple's suppliers Foxconn and Pegatron.
Notice the success story: India is now a major smartphone exporter, and phones have become one of its top export items. PLI pays firms a share of their extra sales, to boost manufacturing and cut imports.
the 3.2% figure is close to India's share of world GDP or services trade. For goods it is far lower.
Answer as per the official UPSC answer key.
Consider the following statements :
The 'Stability and Growth Pact' of the European Union is a treaty that
- 1. limits the levels of the budgetary deficit of the countries of the European Union
- 2. makes the countries of the European Union to share their infrastructure facilities
- 3. enables the countries of the European Union to share their technologies
How many of the above statements are correct?
Answer (a) & explanation
Only one statement is correct (a). Statement 1 is right: the Stability and Growth Pact (1997) is a set of fiscal rules for EU members: the budget deficit should stay below 3% of GDP and public debt below 60% of GDP. Countries that break the rules face an excessive deficit procedure. Statement 2 is wrong: it says nothing about sharing infrastructure. Statement 3 is wrong: it says nothing about sharing technology.
Notice that the rules were suspended during COVID-19 and reformed in 2024, giving countries more time to cut debt. The aim is to keep the euro stable, since members share a currency but run their own budgets. India's version is the FRBM Act, 2003, which sets fiscal deficit targets for the Centre.
Answer as per the official UPSC answer key.
Consider the following statements about G-20 :
- 1. The G-20 group was originally established as a platform for the Finance Ministers and Central Bank Governors to discuss the international economic and financial issues.
- 2. Digital public infrastructure is one of India's G-20 priorities.
Which of the statements given above is/are correct?
Answer (c) & explanation
Both statements are correct (c). Statement 1 is right: the G-20 began in 1999, after the Asian financial crisis, as a meeting of finance ministers and central bank governors to discuss global economic issues. It was raised to leaders' level in 2008, after the global financial crisis. Statement 2 is right: during its 2023 presidency, India pushed digital public infrastructure, such as UPI and Aadhaar-style platforms, as a key priority, and the New Delhi Declaration endorsed it.
Notice India's other G-20 wins: the African Union became a permanent member, and the theme was "Vasudhaiva Kutumbakam", One Earth, One Family, One Future. India also launched the Global Biofuels Alliance. South Africa held the presidency in 2025, the first in Africa.
Answer as per the official UPSC answer key.
Consider the following infrastructure sectors :
- 1. Affordable housing
- 2. Mass rapid transport
- 3. Health care
- 4. Renewable energy
On how many of the above does UNOPS Sustainable Investments in Infrastructure and Innovation (S3i) initiative focus for its investments?
Answer (c) & explanation
S3i focuses on three of the four (c). The UN Office for Project Services (UNOPS) launched Sustainable Investments in Infrastructure and Innovation (S3i) in 2018 to bring private money into infrastructure in developing countries. Its three focus areas are affordable housing, renewable energy and health infrastructure. Item 2 is wrong: mass rapid transport is not one of them. So options (a), (b) and (d) are wrong.
Notice that S3i projects included plans for affordable homes in countries such as Ghana, Kenya and Pakistan, and renewable projects in the Caribbean. UNOPS itself is a UN body based in Copenhagen that manages projects for governments and other UN agencies. The initiative later ran into financial mismanagement concerns and was wound down.
Answer as per the official UPSC answer key.
Consider the following statements :
Statement-I :
Switzerland is one of the leading exporters of gold in terms of value.
Statement-II :
Switzerland has the second largest gold reserves in the world.
Which one of the following is correct in respect of the above statements?
Answer (c) & explanation
Statement I is correct but Statement II is wrong (c). Statement I is right: Switzerland refines a huge share of the world's gold, at refineries in Ticino and elsewhere. It imports raw gold and old bars, and exports refined bars, so it is one of the largest exporters of gold by value. Statement II is wrong: the Swiss central bank's reserves, about 1,040 tonnes, rank around seventh or eighth, not second. The USA holds the most, over 8,000 tonnes, followed by Germany.
Notice India's place: the RBI holds about 880 tonnes, among the top ten, and has been buying and bringing gold home from London. India is also one of the world's two biggest gold consumers, along with China.
the export is from refining, not from a big vault. Trade and reserves are different things.
Answer as per the official UPSC answer key.
"Rapid Financing Instrument" and "Rapid Credit Facility" are related to the provisions of lending by which one of the following ?
Answer (b) & explanation
Both are IMF lending windows (b). The Rapid Financing Instrument (RFI) and the Rapid Credit Facility (RCF) are emergency windows of the International Monetary Fund for countries facing an urgent balance of payments need, such as after a natural disaster, a conflict or the COVID-19 shock. The RFI is open to all members. The RCF gives concessional (zero or low-interest) loans to low-income countries through the Poverty Reduction and Growth Trust. Neither needs a full IMF programme. The ADB (a), UNEP FI (c) and World Bank (d) do not run these facilities.
Notice the IMF's other tools: the Extended Fund Facility and Stand-By Arrangements, and Special Drawing Rights (SDRs). India took an IMF loan in 1991.
"Financing" and "Credit" sound like a development bank. Quick, short-term BoP help is the IMF's job.
Answer as per the official UPSC answer key.
With reference to the Indian economy, consider the following statements :
- 1. An increase in Nominal Effective Exchange Rate (NEER) indicates the appreciation of rupee.
- 2. An increase in the Real Effective Exchange Rate (REER) indicates an improvement in trade competitiveness.
- 3. An increasing trend in domestic inflation relative to inflation in other countries is likely to cause an increasing divergence between NEER and REER.
Which of the above statements are correct ?
Answer (c) & explanation
Statements 1 and 3 are correct (c). Statement 1 is right: NEER (Nominal Effective Exchange Rate) is a weighted average of the rupee against a basket of trading partners' currencies; a rise means the rupee has appreciated. Statement 2 is wrong: REER adjusts NEER for inflation differences. A rising REER means Indian goods are getting dearer abroad, so competitiveness falls, not improves. Statement 3 is right: if India's inflation runs higher than its partners', REER rises even when NEER does not, so the two drift apart.
Notice that the RBI publishes NEER and REER on 40-currency and 6-currency baskets. A REER above 100 suggests the rupee is overvalued against the base year.
statement 2 reverses the effect. A stronger real rupee hurts exporters; it does not help them.
Answer as per the official UPSC answer key.
With reference to the "G20 Common Framework", consider the following statements :
- 1. It is an initiative endorsed by the G20 together with the Paris Club.
- 2. It is an initiative to support Low Income Countries with unsustainable debt.
Which of the statements given above is/are correct ?
Answer (c) & explanation
Both statements are correct (c). Statement 1 is right: the Common Framework for Debt Treatments beyond the DSSI was agreed in November 2020 by the G20 together with the Paris Club of creditor nations. Statement 2 is right: it lets low-income countries with unsustainable debt seek restructuring with all official creditors at one table, including newer lenders such as China that are not in the Paris Club. Zambia, Ghana and Ethiopia applied under it.
Notice its forerunner, the Debt Service Suspension Initiative (DSSI) of 2020, which paused repayments during COVID. India, as G20 president in 2023, pushed for faster debt relief for the Global South. Critics say the framework has been slow.
Answer as per the official UPSC answer key.
With reference to foreign-owned e-commerce firms operating in India, which of the following statements is/are correct ?
- 1. They can sell their own goods in addition to offering their platforms as market-places.
- 2. The degree to which they can own big sellers on their platforms is limited.
Select the correct answer using the code given below :
Answer (d) & explanation
Neither statement is correct (d). India allows 100% FDI in e-commerce only in the marketplace model, where the platform connects buyers and sellers. Statement 1 is wrong: a foreign-owned platform may not hold its own inventory and sell its own goods; the inventory model is barred for FDI. Statement 2 is wrong as worded: since the 2018 rules, a seller in which the platform or its group has any equity cannot sell on that platform at all. This is a ban, not a limit on the degree of ownership.
Notice that the rules targeted Amazon and Flipkart (Walmart). India also built ONDC (Open Network for Digital Commerce, 2022), a government-backed open network meant to give small sellers a fairer chance.
statement 2 sounds mild and true. The rule does not limit such ownership; it bars those sellers outright.
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. Tight monetary policy of US Federal Reserve could lead to capital flight.
- 2. Capital flight may increase the interest cost of firms with existing External Commercial Borrowings (ECBs).
- 3. Devaluation of domestic currency decreases the currency risk associated with ECBs.
Which of the statements given above are correct ?
No official answer (question dropped) & notes
UPSC dropped this question, so no answer was counted. Still, the ideas are core economy. Statement 1 is sound: when the US Federal Reserve raises rates, investors pull money out of emerging markets for safer US returns. This is capital flight, and it weakens their currencies. Statement 2 is sound: a weaker rupee means a firm with External Commercial Borrowings needs more rupees to pay the same dollar interest. Statement 3 is wrong: devaluation raises, not lowers, the currency risk of foreign-currency loans.
Notice the 2013 "taper tantrum", when Fed hints sank the rupee. That is why the RBI asks firms to hedge ECBs and keeps large forex reserves.
UPSC did not evaluate this question, so no official answer exists. Use it for practice only.
UPSC dropped this question from evaluation; there is no official answer.
Consider the following :
- 1. Asian Infrastructure Investment Bank
- 2. Missile Technology Control Regime
- 3. Shanghai Cooperation Organisation
India is a member of which of the above ?
Answer (d) & explanation
India is a member of all three (d). Item 1 is right: India is a founding member of the Asian Infrastructure Investment Bank, which began work in 2016 in Beijing, and is its second-largest shareholder after China, as well as its largest borrower. Item 2 is right: India joined the Missile Technology Control Regime in June 2016, which helps it buy and sell missile technology. Item 3 is right: India became a full member of the Shanghai Cooperation Organisation in 2017, along with Pakistan. So options (a), (b) and (c) all leave something out.
Notice India's place in the export control clubs: it is in the MTCR, the Wassenaar Arrangement (2017) and the Australia Group (2018), but its bid for the Nuclear Suppliers Group stays blocked by China.
AIIB is led by China, so many assume India stayed out. India is in fact its largest borrower.
UPSC repeats traps like this year after year. The PYQ Book gathers every trap in one place, so you see them coming. Try the free sample
Answer as per the official UPSC answer key.
Consider the following statements :
- 1. Vietnam has been one of the fastest growing economies in the world in the recent years.
- 2. Vietnam is led by a multi-party political system.
- 3. Vietnam's economic growth is linked to its integration with global supply chains and focus on exports.
- 4. For a long time Vietnam's low labour costs and stable exchange rates have attracted global manufacturers.
- 5. Vietnam has the most productive e-service sector in the Indo-Pacific region.
Which of the statements given above are correct ?
Answer (c) & explanation
Statements 1, 3 and 4 are correct (c). Statement 1 is right: Vietnam has grown at about 6–7% a year for most of the past decade, among the fastest anywhere. Statement 3 is right: that growth comes from joining global supply chains and exporting electronics, phones and garments. Statement 4 is right: low wages and a stable currency drew makers such as Samsung, and many firms moving out of China. Statement 2 is wrong: Vietnam is a one-party state run by the Communist Party. Statement 5 is wrong: nothing marks its e-services as the region's most productive.
Notice the "China plus one" strategy, under which companies add a second base outside China. Vietnam is India's main rival for these factories, which India chases through PLI schemes.
Answer as per the official UPSC answer key.
Consider the following :
- 1. Foreign currency convertible bonds
- 2. Foreign institutional investment with certain conditions
- 3. Global depository receipts
- 4. Non-resident external deposits
Which of the above can be included in Foreign Direct Investments?
Answer (a) & explanation
FCCBs, FII investment with conditions, and GDRs can count as FDI (a). FDI means a lasting stake in a company. Item 1 is right: Foreign Currency Convertible Bonds turn into equity when converted, so they are counted as FDI under the rules. Item 2 is right: a foreign investor holding 10% or more of a listed company is treated as FDI, not portfolio investment. Item 3 is right: Global Depository Receipts represent shares of an Indian company held abroad. Item 4 is wrong: NRE deposits are bank deposits by non-resident Indians, a debt flow, not investment in a company.
Notice ADRs, the US-listed version of GDRs. The Arvind Mayaram Committee (2014) set the 10% line between FDI and FPI.
NRE deposits come from abroad and are large, but they are deposits, not ownership.
Answer as per the official UPSC answer key.
Consider the following statements :
The effect of devaluation of a currency is that it necessarily
- 1. improves the competitiveness of the domestic exports in the foreign markets
- 2. increases the foreign value of domestic currency
- 3. improves the trade balance
Which of the above statements is/are correct?
Answer (a) & explanation
Only statement 1 is correct (a). Devaluation is a deliberate cut in the value of the currency against foreign currencies, under a fixed or managed rate. Statement 1 is right: Indian goods become cheaper abroad, so exports become more competitive. Statement 2 is wrong: devaluation reduces, not increases, the currency's foreign value. Statement 3 is wrong because of the word "necessarily": imports such as oil become dearer, and if demand does not respond quickly, the trade deficit may first widen. This is the J-curve effect.
Notice India's big devaluations in 1966 and 1991. Note the difference: devaluation is a policy step under a fixed rate; depreciation is a market fall under a floating rate.
the word "necessarily". It turns statement 3 from possible into wrong.
Answer as per the official UPSC answer key.