Economic Reforms 1991 — Set 7

Correct Answer: B. Comprehensive tax reforms including GST

The Kelkar Report (2003), formally the Report of the Task Force on Implementation of the Fiscal Responsibility and Budget Management Act, chaired by Vijay Kelkar, recommended comprehensive tax reforms including: simplification of income tax, rationalization of corporate tax, introduction of GST (replacing multiple state and central taxes), and rationalizing customs duties. The GST recommendation eventually materialized with the GST implementation in July 2017. The Kelkar Report was influential in shaping India's tax policy reform trajectory.

Correct Answer: B. Fiscal Responsibility and Budget Management Act

FRBM stands for Fiscal Responsibility and Budget Management Act, enacted in August 2003. It required the Central Government to eliminate revenue deficit and reduce fiscal deficit to 3% of GDP by 2008-09. The FRBM Act was a legislative commitment to fiscal discipline, inspired by the need to prevent recurrence of the 1991 crisis. The N.K. Singh Committee (2017) reviewed the FRBM framework and recommended retaining the 3% fiscal deficit target. FRBM has been amended several times.

Correct Answer: C. 2004

India first received FDI exceeding $10 billion annually around 2004-05. Before 2000, annual FDI was typically below $5 billion. The acceleration of FDI followed deeper economic reforms and the liberalization of FDI caps in various sectors. By 2007-08, India was receiving over $30 billion in FDI annually. The FDI growth reflected global confidence in India's economic potential post-liberalization. India has become one of the top FDI destinations globally.

Correct Answer: B. It provided 100% export-oriented status and duty-free imports

The Software Technology Parks of India (STPI) scheme launched in 1991 was crucial for India's IT boom because it provided 100% export-oriented status, allowing IT companies to export services and import equipment duty-free. STPI also provided broadband connectivity infrastructure when internet was not widely available. It gave income tax exemptions to IT companies. This created a special economic zone framework for the IT sector, enabling companies like Infosys, Wipro, and TCS to scale rapidly. The scheme was administered by MeitY.

Correct Answer: B. Gap between government's total expenditure and revenue receipts

Fiscal deficit is the gap between the government's total expenditure and its total receipts (excluding borrowings). It represents the amount the government needs to borrow to finance its spending. India's fiscal deficit was approximately 8.5% of GDP before the 1991 reforms. High fiscal deficit leads to inflation, crowding out of private investment, and unsustainable debt. The 1991 reforms included fiscal consolidation measures, and the FRBM Act (2003) institutionalized the commitment to reducing the fiscal deficit.

Correct Answer: B. Opening up of insurance sector to private companies

The opening up of the insurance sector to private companies was NOT part of the 1991 New Economic Policy. Insurance sector liberalization came later — the IRDA (Insurance Regulatory and Development Authority) Act was passed in 1999 and private insurance companies were allowed to operate from 2000. The 1991 reforms focused on industrial delicensing, trade liberalization, exchange rate reform, and fiscal consolidation. Insurance and pension sector reforms came in the late 1990s and 2000s.

Correct Answer: C. Chakravarthi Rajagopalachari (Rajaji)

The phrase 'Licence Raj' (License Raj) is often attributed to Chakravarthi Rajagopalachari (popularly known as Rajaji), the veteran Indian statesman and former Governor-General. He used this phrase to critique the excessive government controls and bureaucratic red tape that stifled private enterprise. Rajaji was a founder of the Swatantra Party (1959) which advocated for free-market policies. The term became widely used to describe the pre-1991 era of industrial controls, import licenses, and quotas.

Correct Answer: C. Integration into global trade and financial systems

The 1991 reforms fundamentally impacted India's integration into global trade and financial systems. By reducing tariffs, inviting FDI, making the rupee convertible on current account, and joining WTO (1995), India became much more integrated with the global economy. India's exports grew from about $18 billion in 1991 to over $500 billion in 2022. India's share of global GDP increased from about 1% in 1991 to over 3.5% in 2024. The reforms unlocked India's potential to become a major global economic player.

Correct Answer: C. Chelliah Committee on Tax Reform

The Chelliah Committee on Tax Reform (Tax Reforms Committee, 1991-92) was set up under Raja J. Chelliah. Though technically set up under Narasimha Rao's government in 1991, it was part of the reform process initiated earlier. The committee recommended comprehensive tax rationalization including reducing income tax rates, reducing corporate tax rates, broadening the tax base, and simplifying tax administration. Its recommendations influenced India's tax reforms throughout the 1990s.

Correct Answer: C. 3.5%

India's current account deficit was approximately 3.5% of GDP in 1991, which was unsustainable given the low foreign exchange reserves and high external debt. The current account deficit was financed by external borrowings, but with the Gulf War disrupting oil markets and reducing Gulf remittances, the financing had dried up. The combination of fiscal deficit (8.5% of GDP) and current account deficit (3.5% of GDP) — the 'twin deficit' — was a key feature of the 1991 crisis.