Comprehension : Comprehension

Q 167 / 466

UPSC CSE Prelims 2020

Private investment, in general, is volatile. Foreign private investment is more volatile because the available investment avenues are significantly greater (i.e., the entire world). Therefore, the responsibility of providing employment cannot be left to Foreign Direct Investment (FDI). The current FDI inflows are volatile over time and across sectors and regions, which is a necessary consequence of their search for the highest returns. The adverse consequences are unstable employment and accentuation of income and regional inequalities. A probable positive consequence of foreign investment is the inflow of new technology and its subsequent diffusion. However, the technology diffusion is not at all certain because the existing state of physical and human capital in India may prove inadequate for the diffusion.

With reference to the above passage, the following assumptions have been made:

  1. Relying on foreign investment, in the long run, is not an economically sound policy.
  2. Policies must be undertaken to reduce volatility in foreign private investment.
  3. Policies must be undertaken to strengthen domestic private investment.
  4. Public investment should be given priority over private investment.
  5. Substantial public investment in education and health should be undertaken.

Which of the above assumptions is/are valid?

EXPLANATION

Correct Option (2)

Assumption 3 is valid. The passage critically analyzes foreign private investment (FDI), highlighting its inherent volatility, instability in employment generation, and uncertainty regarding technology diffusion due to inadequate domestic physical and human capital. By detailing these limitations and risks associated with FDI, the passage implicitly suggests that strengthening domestic private investment would constitute a more stable and reliable approach to economic development and employment. Therefore, the need for policies to strengthen domestic private investment can be logically inferred.

Incorrect Options:

Assumption 1 is not valid. The passage discusses the risks and volatility of relying on foreign investment for employment and technology diffusion. However, it does not make a categorical statement that relying on foreign investment in the long run is an economically unsound policy in its entirety. It focuses on specific adverse consequences rather than a complete rejection of FDI.

Assumption 2 is not valid. The passage describes the volatility of foreign private investment as a necessary consequence of its global search for the highest returns. It presents this volatility as an inherent characteristic of such investments rather than suggesting that policies should be undertaken to reduce this volatility. The text does not propose interventions to stabilize FDI inflows.

Assumption 4 is not valid. The passage primarily contrasts the characteristics of foreign private investment with the need for a stable investment environment, implicitly favoring domestic private investment. It does not introduce a comparison between public and private investment, nor does it advocate for prioritizing public investment over private investment.

Assumption 5 is not valid. While the passage notes that India’s existing physical and human capital may be inadequate for technology diffusion, it does not explicitly recommend substantial public investment in education and health as a policy measure. This would be an extrapolation beyond the direct statements and scope of the provided text.