Economic Reforms 1991 — Set 1

Correct Answer: C. $1 billion (barely 2 weeks of imports)

In 1991, India's foreign exchange reserves had fallen to approximately $1 billion, enough for only about 2-3 weeks of imports. This was a severe BOP crisis that threatened India's ability to meet international obligations. To avoid default, India pledged 67 tonnes of gold to the Bank of England and 20 tonnes to the Bank of Japan. This crisis forced India to undertake comprehensive economic reforms.

Correct Answer: C. P.V. Narasimha Rao

P.V. Narasimha Rao was the Prime Minister of India during the landmark 1991 economic reforms. He led a minority Congress government but pushed through sweeping economic liberalization. He appointed Dr. Manmohan Singh as Finance Minister, who was the architect of the reforms. Rao's political courage in implementing unpopular reforms has led many economists to credit him as the father of India's economic liberalization.

Correct Answer: C. Dr. Manmohan Singh

Dr. Manmohan Singh was the Finance Minister who presented the historic Union Budget on July 24, 1991 and implemented the economic reforms. In his budget speech, he famously quoted Victor Hugo: 'No power on earth can stop an idea whose time has come.' He was a former RBI Governor and Chief Economic Adviser who brought academic rigor to policy reform. His 1991 budget is considered one of the most transformative in Indian history.

Correct Answer: B. Liberalization, Privatization, Globalization

The 1991 economic reforms are called 'LPG reforms' — Liberalization, Privatization, and Globalization. Liberalization involved removing controls and regulations (like industrial licensing). Privatization involved reducing the state's role in production and allowing private sector growth. Globalization involved opening the Indian economy to foreign trade and investment. These three pillars fundamentally transformed India's economic policy framework.

Correct Answer: C. Both Gulf War oil shock and internal fiscal imbalances

The 1991 BOP crisis was caused by multiple factors: the Gulf War (1990-91) led to a sharp rise in oil prices and a drop in remittances from the Gulf, creating an external shock. Internally, India had been running large fiscal deficits throughout the 1980s, leading to high inflation and current account deficits. The assassination of Rajiv Gandhi further created political uncertainty. This combination of external and internal pressures led to the crisis.

Correct Answer: B. 67 tonnes

India pledged 67 tonnes of gold with the Bank of England (and 20 tonnes with the Bank of Japan) in 1991 to raise approximately $600 million in foreign exchange. This was a politically sensitive act, as the gold had to be secretly transported under tight security. The operation was coordinated by Finance Secretary S. Venkitaramanan. The gold was later fully redeemed once India's reserves recovered.

Correct Answer: C. IMF under Structural Adjustment Programme

The IMF provided a loan of approximately $2.2 billion to India in 1991 under its Structural Adjustment Programme. This came with conditionalities that required India to reduce fiscal deficits, liberalize trade, devalue the currency, and undertake structural reforms. The IMF loan provided breathing room for India's economy while reforms were implemented. Critics argued that IMF conditionalities compromised India's economic sovereignty.

Correct Answer: B. 18-19%

The Indian rupee was devalued by approximately 18-19% in two steps in July 1991. The first devaluation of about 9% happened on July 1, and another 9% on July 3, 1991. This made Indian exports cheaper and imports dearer, helping correct the external imbalance. The devaluation was a key part of the macroeconomic stabilization measures taken alongside structural reforms. It helped restore India's competitiveness in global markets.

Correct Answer: B. 18 industries

The New Industrial Policy of 1991 dramatically reduced the number of industries requiring industrial license to just 18 (later further reduced to 6). Before 1991, virtually all industries required licensing under the Industries (Development and Regulation) Act, 1951. This ended the 'License Raj' that had constrained private enterprise. The remaining licensed industries included those with security, environmental, health, or strategic concerns.

Correct Answer: A. Monopolies and Restrictive Trade Practices Act

MRTP stands for Monopolies and Restrictive Trade Practices Act, 1969. This act was designed to prevent concentration of economic power and control monopolies. As part of the 1991 reforms, the MRTP Act was diluted — the requirement for prior approval of expansion by large companies (MRTP companies) was removed. Later, the MRTP Act was replaced by the Competition Act, 2002, which established the Competition Commission of India (CCI).