Economic Reforms of 1991: Crisis and the LPG Policy

The correct answer is A, P. V. Narasimha Rao. He became Prime Minister in June 1991, in the middle of the balance of payments crisis, and his government devalued the rupee, borrowed from the International Monetary Fund and announced the New Economic Policy of liberalisation, privatisation and globalisation, with the Statement on Industrial Policy issued on 24 July 1991. Option C is the trap that catches most candidates: Manmohan Singh was the Finance Minister who presented the reform budget of 1991 and is rightly linked with the reforms, but he became Prime Minister only in 2004. Option B is wrong because Atal Bihari Vajpayee headed governments later, in 1996 and from 1998, when the second generation of reforms and much of the disinvestment took place. Option D is wrong because option A names the right person.

The correct answer is B, liberalisation. Liberalisation means freeing economic activity from government controls: industrial licences, import licences and quantitative restrictions, ceilings on investment and administered interest rates. In India this was the first strand of the reforms of 1991. Option A is wrong because globalisation is the wider integration of a country's economy with the world through trade, investment, technology and movement of people; removing trade barriers helps globalisation but the act itself is liberalisation. Option C is wrong because privatisation is a transfer of ownership or management from the state to private hands, which is a question of who owns a firm rather than of what rules it must follow. Option D is wrong because arbitration is a method of settling disputes outside the courts and has nothing to do with trade policy.

The correct answer is B, 24 July 1991. The Statement on Industrial Policy of that date ended licensing for all industries except a short reserved list, cut back the industries kept for the public sector, removed the requirement of prior government approval for expansion by large firms under the monopolies law, and allowed foreign direct investment up to fifty-one per cent automatically in a list of high priority industries. Option A is wrong because 1 April is the beginning of the financial year and no such policy was issued that day. Option C is wrong because 1 January 1995 is the date on which India became a founder member of the World Trade Organisation. Option D is wrong because it moves the right day into the wrong year, a common form of trap in date questions.

The correct answer is A, LPG, standing for liberalisation, privatisation and globalisation. Liberalisation removed licensing and other controls on industry and trade, privatisation reduced the ownership and the role of the public sector through disinvestment and strategic sales, and globalisation opened the economy to foreign trade, investment and technology. Option B is wrong because GST is the goods and services tax, an indirect tax reform of a much later period. Option C is wrong because MRTP refers to the Monopolies and Restrictive Trade Practices Act of 1969, a law of the pre-reform era which the reforms first amended and which was later replaced by the Competition Act of 2002. Option D is wrong because FEMA is the Foreign Exchange Management Act of 1999, one measure within the reforms rather than a name for the whole policy.

The correct answer is B, Manmohan Singh. As Finance Minister in the government of P. V. Narasimha Rao he presented the budget of July 1991, which cut subsidies, reduced the fiscal deficit, lowered tariffs and set out the framework of the reforms, following the devaluation of the rupee earlier that month. Option A is wrong because Yashwant Sinha was Finance Minister later, in the governments of the late 1990s, and is associated with the second generation of reforms. Option C is wrong because Pranab Mukherjee had been Finance Minister in the 1980s and returned to the office only in 2009. Option D is wrong because C. Rangarajan was a central banker and economist who chaired committees on the balance of payments and on disinvestment, but he did not present a budget.

The correct answer is B, devalued in two steps by about nineteen per cent in all. The Reserve Bank lowered the value of the rupee on 1 July and again on 3 July 1991 to make exports cheaper abroad, discourage imports and restore confidence in the currency during the crisis. Option A is wrong because a revaluation upward would have widened the trade gap, the opposite of what the situation demanded. Option C is wrong because convertibility came later and only on the current account, allowed in stages after the dual exchange rate system of 1992 and completed in 1994; the rupee is still not fully convertible on the capital account. Option D is wrong because the reforms moved India away from a fixed rate towards a market determined exchange rate, not towards a permanent peg.

The correct answer is B, M. Narasimham. His committee of 1991 recommended reducing the statutory pre-emption of bank funds through the Cash Reserve Ratio and the Statutory Liquidity Ratio, allowing new private banks, introducing prudential norms for the recognition of income and for capital adequacy, and giving banks freedom in branch expansion; a second committee under him reported in 1998 on supervision and consolidation. Option A is wrong because Raja Chelliah headed the tax reforms committee of the same period, and pairing him with taxes and Narasimham with banking is the distinction being tested. Option C is wrong because C. Rangarajan chaired committees on the balance of payments and on disinvestment. Option D is wrong because Bimal Jalan is associated with later work, including a committee on the economic capital framework of the Reserve Bank.

The correct answer is B, the Foreign Exchange Management Act of 1999. The older Act of 1973 treated a breach of exchange control as a criminal offence and presumed guilt; the new Act treats most breaches as civil contraventions punishable with a penalty, and its purpose is stated as facilitating external trade and payments and the orderly development of the foreign exchange market. Option A is wrong because the Competition Act of 2002 replaced the Monopolies and Restrictive Trade Practices Act, a different law of the pre-reform era. Option C is wrong because the export and import policy of 1992 liberalised trade licensing but did not replace the exchange law. Option D is wrong because the money laundering Act of 2002 deals with the proceeds of crime and was enacted for a different purpose altogether.

The correct answer is B, 1 January 1995. The World Trade Organisation came into being on that date at the end of the Uruguay Round of negotiations, taking the place of the General Agreement on Tariffs and Trade of 1947, and India, having been a party to the GATT, became a founder member. Membership required India to bind its tariffs, phase out quantitative restrictions on imports and accept agreements on agriculture, services and intellectual property. Option A is wrong because 24 July 1991 is the date of the Statement on Industrial Policy. Option C is wrong because no such landmark falls on 1 April 1997 in this context. Option D is wrong because by 2000 India was already a member and was in fact removing the last of its quantitative restrictions under WTO obligations.

The correct answer is B, disinvestment. It is the sale of a part of the government's equity in a public enterprise, either to the public through the stock market or to institutional and strategic buyers; when a majority holding is sold and management also passes to the buyer, it is called a strategic sale. Option A is wrong because nationalisation is the opposite process, the transfer of a private undertaking to state ownership, as with the banks in 1969 and 1980. Option C is wrong because devaluation is a reduction in the external value of the currency, which is a matter of exchange rate policy. Option D is wrong because deficit financing means meeting government expenditure by borrowing or by creating money, which is how the deficits of the 1980s were financed in the first place.

The correct answer is A, the Competition Act, 2002. The older law had treated size itself with suspicion and required large firms to obtain the government's approval before expanding, setting up a new undertaking or merging; the reforms of 1991 removed that requirement, and the Act of 2002 replaced the law altogether, shifting attention from the size of a firm to its conduct, that is to anti-competitive agreements, abuse of a dominant position and combinations, with the Competition Commission of India as the regulator. Option B is wrong because the Companies Act governs the formation and management of companies. Option C is wrong because industrial disputes law concerns employers and workmen. Option D is wrong because the Consumer Protection Act deals with the redress of consumers' grievances, a related but separate field.

The correct answer is A, about two weeks. Reserves had been drained by years of current account deficits, by the rise in oil prices and the fall in remittances after the Gulf crisis, and by the withdrawal of deposits held by non-resident Indians, and at the worst point they could cover only a fortnight of imports. That is why the government borrowed from the International Monetary Fund and pledged gold abroad to raise foreign exchange. Options B, C and D describe comfortable positions that a country builds up in good years, and reserves of six months or more of imports are considered a sign of strength rather than of crisis. A country whose reserves cover a year or three years of imports is in no need of an emergency loan, which is exactly the contrast the question is drawing.