Read the following statements carefully and choose the correct option regarding Assertion (A) and Reason (R).
Assertion (A): Devaluation of the rupee in 1991 improved export competitiveness.
Reason (R): A weaker rupee made Indian goods cheaper in global markets.
Show answer & explanation
Correct answer: A
Explanation
Correct Answer: Both A and R are true, and R is the correct explanation of A.
Explanation:
- Assertion (A) is true: During the Balance of Payments (BoP) crisis of 1991, the Government of India and the RBI devalued the Rupee by approximately 18–20% in two phases during July 1991. The primary objective of this move was to make Indian exports more competitive in the international market.
- Reason (R) is true: When a currency is devalued, it becomes weaker relative to foreign currencies (such as the Dollar). Consequently, Indian goods become cheaper for foreign buyers, which boosts the demand for Indian products in the global market and leads to an improvement in exports.
Effects of Devaluation:
- Exports: Since they become cheaper, the demand for Indian goods abroad increases.
- Imports: They become more expensive, leading to a reduction in non-essential imports and providing a boost to domestic industries.
- Trade Deficit: An increase in exports coupled with a decrease in imports helps in reducing the trade deficit.
Important Facts for Upcoming Examinations:
- Question: How many times has the Rupee been officially devalued in India to date?
- Answer: Primarily three times (1949, 1966, and 1991).
- Question: Who was the Finance Minister of India at the time of the 1991 economic reforms?
- Answer: Dr. Manmohan Singh.
- Question: What is the difference between 'Devaluation' and 'Depreciation'?
- Answer: Devaluation is a deliberate act undertaken by the government, whereas depreciation occurs due to market forces (demand and supply).