Economic Reforms 1991 — Set 5

Correct Answer: C. 17%

India's inflation rate (WPI-based) was approximately 16-17% in 1991 when reforms were initiated. This high inflation was a result of the large fiscal deficit, money supply expansion, and supply shocks from the Gulf War. The reform programme included fiscal consolidation that aimed to reduce inflation. After the initial adjustment, inflation declined to single digits by the mid-1990s. Controlling inflation was one of the key macroeconomic objectives of the stabilization package.

Correct Answer: D. Complete privatization of all banks

The Tarapore Committee on Capital Account Convertibility (1997) recommended conditions including: fiscal deficit below 3.5% of GDP, gross NPAs reduced to 5% of banking system, CPI inflation between 3-5%, financial sector reforms, and adequate foreign exchange reserves. 'Complete privatization of all banks' was NOT a condition. The committee cautioned that premature capital account convertibility could expose India to speculative attacks on the currency. The 1997 Asian Financial Crisis reinforced these concerns.

Correct Answer: B. Meat and poultry processing

The 'Pink Revolution' is associated with the meat and poultry processing sector in India. It refers to the growth in meat production and exports following economic liberalization. However, a more commonly cited 'revolution' in the context of 1991 reforms is the IT and software boom (sometimes called 'IT Revolution'). The term 'Pink Revolution' gained attention particularly in policy discussions around meat exports. The liberalization of the economy facilitated growth in agro-processing sectors.

Correct Answer: C. Tata Group

VSNL (Videsh Sanchar Nigam Limited) was privatized in 2002 when the government sold its stake to the Tata Group. This was one of the first major strategic sales of a PSU. Tata Group acquired management control of VSNL through the purchase of a 25% equity stake from the government. VSNL was India's international telecommunications company that had held a monopoly on international calls. Later, VSNL was renamed as Tata Communications. This privatization opened India's telecom sector to competition.

Correct Answer: B. 6.2%

India's average GDP growth in the 1990s was approximately 6.2%, higher than the 5.8% in the 1980s. The growth began to accelerate more significantly in the 2000s when it reached 7-8% on average. The 1991 reforms created conditions for higher growth through productivity improvements and efficiency gains. Critics note that inequality also increased alongside growth in the post-reform period. The full benefits of liberalization took several years to materialize.

Correct Answer: C. Monetary policy and interest rate reforms

The Chakravarty Committee (Committee to Review the Working of the Monetary System, 1985) chaired by Sukhamoy Chakravarty recommended reforms in India's monetary framework, including greater flexibility in interest rates and more sophisticated monetary management. Its recommendations influenced the monetary policy aspects of the 1991 reforms, including the eventual move toward market-determined interest rates and the strengthening of RBI's monetary policy framework. The committee helped lay the groundwork for later reforms.

Correct Answer: C. 51%

The 1991 New Economic Policy initially allowed FDI up to 51% equity (majority foreign ownership) in priority industries under the automatic route. Before 1991, foreign equity was typically capped at 40% under the Foreign Exchange Regulation Act (FERA). The 51% limit allowed foreign companies to have majority ownership for the first time. Over subsequent years, FDI limits were progressively raised to 74%, 100% in various sectors. The automobile sector, for instance, was allowed 100% FDI under automatic route after 2002.

Correct Answer: A. Liberalized Exchange Rate Management System

LERMS stands for Liberalized Exchange Rate Management System, introduced in March 1992 as a transitional step toward full current account convertibility. Under LERMS, 60% of foreign exchange earnings could be converted at market rate and 40% at the official rate. This dual exchange rate system was a transitional arrangement. By March 1993, the dual system was unified with a single market-determined exchange rate, achieving full current account convertibility.

Correct Answer: C. Montek Singh Ahluwalia

Montek Singh Ahluwalia is often considered the key economic bureaucrat who helped design and implement the 1991 reforms alongside Finance Minister Manmohan Singh. He served as Finance Secretary and later as Commerce Secretary during this period. His experience in international development finance and economic policy was crucial. He later served as Deputy Chairman of the Planning Commission (2004-2014). Together with Manmohan Singh and P.V. Narasimha Rao, he formed the core reform team.

Correct Answer: B. 8

The New Industrial Policy 1991 reduced the number of industries reserved exclusively for the public sector from 17 (under the 1956 policy) to just 8. These eight industries were: arms and ammunition, atomic energy, coal and lignite, mineral oils, mining of iron and manganese ore, mining of copper/lead/zinc, atomic minerals, and railway transport. Subsequently, further liberalization reduced this list significantly. Today, only atomic energy and railways in their core aspects remain government monopolies.