Predicted Questions with Model Answers

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Q1 (5 marks — 50 words): What is SDR? Explain the 2021 SDR allocation by IMF.

Model Answer:

SDR (Special Drawing Right) is an international reserve asset created by IMF in 1969 — not a currency itself but a claim on freely usable currencies of IMF members. The SDR basket consists of 5 currencies: USD (43.38%), Euro (29.31%), Chinese Yuan (12.28%), Yen (7.59%), and Pound (7.44%). In August 2021, IMF allocated SDR 456.5 billion ($650 billion) — the largest SDR allocation in IMF history — to all 190 member countries in proportion to their IMF quotas, to boost global liquidity during COVID-19 recovery. India received SDR 12.57 billion (~$17.86 billion).

Q2 (5 marks — 50 words): What is WTO's Most Favoured Nation (MFN) principle? State any two exceptions.

Model Answer:

Most Favoured Nation (MFN) principle (GATT Article I) requires that any trade advantage granted by one WTO member to another must be immediately and unconditionally extended to all other WTO members — preventing trade discrimination between partners. Exceptions to MFN: (1) Regional Trade Agreements (FTAs/Customs Unions) — GATT Art. XXIV allows preferential tariffs within FTAs (e.g., ASEAN FTA, EU Customs Union), provided substantially all trade is covered; (2) Generalised System of Preferences (GSP) — developed countries may give lower tariffs to developing countries under the "Enabling Clause" without extending to all WTO members.

Q3 (5 marks — 50 words): What is the Doha Development Agenda? Why has it stalled?

Model Answer:

The Doha Development Agenda (DDA) is WTO's multilateral trade negotiation round launched in November 2001 in Doha, Qatar — aimed at development-friendly trade reform: reducing agricultural subsidies in rich countries, improving market access for developing nations in goods and services. It has been effectively stalled since 2008 due to fundamental disagreements: the US-India deadlock over Special Safeguard Mechanism (SSM) for agricultural imports protecting poor farmers; EU's reluctance to cut agricultural subsidies; North-South divide on manufacturing tariffs. India's consistent position: food security and livelihood protections must precede market opening.

Q4 (5 marks — 50 words): What are IBRD and IDA? Distinguish between them.

Model Answer:

Both IBRD and IDA are World Bank Group institutions. IBRD (International Bank for Reconstruction and Development, 1944): Lends to middle-income and creditworthy low-income countries at near-market rates (~4-5%); self-financing through bond markets; 189 members. IDA (International Development Association, 1960): Lends to the world's 74 poorest countries on highly concessional terms — 25-40 year maturity, 5-10 year grace, ~0.75% service charge (near-zero interest); funded through replenishments by rich countries. India graduated from IDA eligibility in 2014 and now borrows exclusively from IBRD.

Q5 (10 marks — 150 words): Discuss the role of the IMF in the global monetary system. What are the challenges it faces?

Model Answer:

The International Monetary Fund (IMF) is the cornerstone of the global monetary system, established at Bretton Woods in 1944 and operational since 1947. It serves 190 member countries with three core functions.

Function 1 — Surveillance (Economic Monitoring):
IMF conducts annual Article IV Consultations with each member — a comprehensive economic health check assessing monetary policy, fiscal stance, exchange rate, financial system stability. It publishes the World Economic Outlook (WEO) semi-annually (global growth projections, risks analysis) and the Global Financial Stability Report (GFSR). These publications set the global economic policy agenda. April 2025 WEO: global growth 2.8% for 2025; India 6.2%.

Function 2 — Financial Assistance (BoP Support):
IMF provides financing to countries facing balance of payments crises — preventing disruptive currency collapses and economic contractions. Key facilities:

Stand-By Arrangement (SBA): Short-term crisis support — used by Greece (2010), Turkey, Pakistan (2019, 2024), Argentina (multiple times)
Extended Fund Facility (EFF): Structural reform support; medium-term
Poverty Reduction and Growth Trust (PRGT): Concessional for low-income countries
COVID-19 Response: IMF provided $290 billion in emergency financing to 94 countries (2020-21), the largest emergency financing in IMF history. August 2021 SDR allocation of $650 billion boosted global reserves.
India borrowed from IMF in 1981 ($5.8 billion); informally pledged gold in 1991 BoP crisis but repaid quickly — has been IMF-programme-free since 1993.

Function 3 — Technical Assistance:
IMF provides capacity building in tax policy, public financial management, monetary frameworks, statistics. India has received TA support for GST implementation and pension reform analysis.

Special Drawing Rights (SDRs): IMF's reserve asset — not a currency but a claim on member country currencies. SDR basket: USD (43.38%), EUR (29.31%), RMB (12.28%), JPY (7.59%), GBP (7.44%). India's IMF quota: SDR 13,114 million (2.75% — 13th largest). India's voting power: ~2.63%.

Challenges Facing IMF:

Governance Deficit: IMF quota structure reflects 1944-era power dynamics — US (16.5% votes; can veto key decisions requiring 85% majority) and Europe over-represented; China and India under-represented relative to economic size. India's GDP (PPP) is ~7% of global, but quota only 2.75%.
China's Parallel System: Belt and Road Initiative loans ($1+ trillion to developing countries), AIIB ($35+ billion loans), and NDB create parallel financing channels outside IMF conditionality — reducing IMF's central role.
Debt Distress Architecture: G20 Common Framework for debt restructuring (2020) is slow and untested — Zambia debt restructuring took 3 years to resolve; Sri Lanka crisis (2022) highlighted gaps. IMF cannot force private creditors or China to participate.
Climate Finance: IMF's Resilience and Sustainability Trust (RST) — SDR 40 billion (rechanneled by rich countries) is small relative to developing countries' climate needs ($2.4 trillion/year by 2030 per UNCTAD).
Conditionality Controversy: IMF programme conditions (fiscal austerity, privatisation) face criticism for being anti-growth and socially regressive — Sri Lanka, Pakistan, Argentina case studies.

Q6 (10 marks — 150 words): Explain the role of WTO in regulating global trade. Critically analyse the Appellate Body crisis.

Model Answer:

The World Trade Organization (WTO), established 1 January 1995 (succeeding GATT 1947), is the principal multilateral framework governing international trade. With 166 members and $33 trillion in trade under its rules, it is arguably the most impactful international economic institution.

WTO's Role in Global Trade:

Rule-Making: WTO administers 16 multilateral agreements including GATT 1994 (goods), GATS (services), and TRIPS (intellectual property). These set binding rules for trade — non-discrimination (MFN + national treatment), market access commitments (bound tariff rates), and disciplines on subsidies, dumping, and non-tariff barriers. Every WTO member's trade policies are periodically reviewed (Trade Policy Review Mechanism — TPRM).

Negotiating Forum: WTO is the arena for multilateral trade negotiations. The Doha Development Agenda (2001) was meant to deliver development-friendly reform — but it stalled in 2008. Partial agreements have been reached: Trade Facilitation Agreement (TFA, 2017) simplifies customs procedures and is estimated to reduce global trade costs by 14.3%.

Dispute Settlement: WTO's dispute settlement mechanism (DSM) — often called the "crown jewel" — provides binding, rule-based resolution of trade conflicts, replacing power-based bilateral arm-twisting. Over 600 disputes have been filed since 1995; approximately 200 have gone through full panel/AB proceedings.

India's Engagement: India is a founding member and active participant — member of G-20 (trade negotiation coalition), G-33 (farm issue group), NAMA-11 (manufacturing tariffs). India has used WTO to defend MSP-based food security (Peace Clause), challenge US Section 232 steel tariffs, and advocate Mode 4 services liberalisation for IT workers.

The Appellate Body (AB) Crisis — Critical Analysis:

Background: The AB was established under the Dispute Settlement Understanding (DSU) — a 7-member body hearing appeals of Panel Reports. Its decisions are binding and adopted by reverse consensus.

US Position: Since 2017, the US (under both Obama-era concerns and intensified under Trump) has blocked all AB member appointments, alleging:

AB "creates new obligations" not negotiated by WTO members
AB ignores 90-day deadline for issuing reports (takes 2-3 years)
AB decisions have "judicial overreach" — ruling on issues outside the appeal's scope

Impact: By December 2019, only 1 AB member remained (3 minimum required) — AB became non-functional. As of 2024, all 7 AB seats are vacant.

Consequences:

Disputes filed but cannot be fully resolved — the "tribunal vacuum"
Losing parties file "phantom appeals" — appeal to a non-functional AB, effectively suspending the ruling indefinitely
Over 30+ cases in this limbo state

MPIA — Temporary Fix: 53 WTO members (EU, India, China, Brazil, Canada, Australia) created the Multi-Party Interim Appeal Arbitration Arrangement (MPIA) under Art. 25 — a voluntary, binding alternative to the AB for MPIA members. The US has not joined.

Critical Assessment:

The AB crisis represents a fundamental challenge to rules-based multilateral trade governance
US's unilateralism (Section 232, Section 301 investigations) outside WTO framework undermines the system
If the AB is not restored, WTO reverts to being a negotiating forum without enforcement — making it toothless
India's position: AB should be reformed (address legitimate US concerns about 90-day rule, precedent value) but should not be abandoned; rule-based system benefits all nations, especially India as a large trading country dependent on non-discriminatory market access