Correct Option (b)
A currency crisis typically refers to a situation involving a sharp depreciation of a country's currency, often triggered by a significant outflow of foreign capital or a severe shortage of foreign exchange reserves.
Statement 1: The foreign currency earnings of India's IT sector contribute significantly to India's foreign exchange reserves. These earnings represent a stable inflow of foreign currency, which strengthens the current account balance and provides a buffer against external shocks, thereby reducing the risk of a currency crisis.
Statement 3: Remittances from Indians abroad are a substantial and relatively stable source of foreign exchange for India. These inflows directly augment the country's foreign currency reserves, improve the balance of payments, and enhance the economy's resilience to external vulnerabilities, thus mitigating the risk of a currency crisis.
Incorrect Options
Statement 2: Increasing government expenditure, particularly if it leads to a higher fiscal deficit and is not matched by increased revenue or productive investments, can contribute to macroeconomic instability. A large fiscal deficit can lead to increased borrowing, inflationary pressures, and a potential loss of investor confidence, which could exacerbate, rather than reduce, the risk of a currency crisis. Therefore, increasing government expenditure is generally not considered a factor that reduces the risk of a currency crisis; in some scenarios, it might even increase it.