The New Economic Policy 1991 aimed to reduce fiscal deficit to what medium-term percentage of GDP?
Show answer & explanation
Correct answer: C
Explanation
Solution: The correct answer is 3-4%.
Explanation:
☛ In 1990–91, India faced an unprecedented balance of payments crisis and severe macroeconomic instability, with the gross fiscal deficit escalating to nearly 8% of the GDP.
☛ Under Prime Minister P. V. Narasimha Rao and Finance Minister Dr. Manmohan Singh, the government introduced the New Economic Policy (NEP) in 1991.
☛ A core pillar of the NEP was macroeconomic stabilization, which aimed to restore fiscal discipline and control government borrowings.
☛ Under this reform agenda, the government planned to bring down the gross fiscal deficit over the medium term to a sustainable range of 3–4% of GDP.
Extra Exam-Relevant Facts:
☛ Two-Pronged Strategy: The 1991 reforms comprised Stabilisation Measures (short-term steps to correct balance of payments and rein in inflation) and Structural Reform Measures (long-term steps under Liberalisation, Privatisation, and Globalisation).
☛ Currency Devaluation: In July 1991, the Reserve Bank of India devalued the Indian Rupee in two distinct steps by approximately 18–19% to improve export competitiveness.
☛ Gold Pledging: To secure emergency loans and avoid default on external debt, India air-shipped gold to the Bank of England and Union Bank of Switzerland.
☛ FRBM Act: The statutory fiscal consolidation target was later institutionalised through the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, fixing a ceiling of 3% of GDP for the fiscal deficit.
Important One-Liners for Upcoming Exams:
☛ Who was the Prime Minister of India during the introduction of the 1991 reforms? → P. V. Narasimha Rao
☛ In which year was the Fiscal Responsibility and Budget Management (FRBM) Act enacted? → 2003
☛ What do the letters 'LPG' stand for in the context of the 1991 economic reforms? → Liberalisation, Privatisation, and Globalisation
☛ What was the statutory fiscal deficit target set under the original FRBM Act 2003? → 3% of GDP
☛ Who was the Governor of the Reserve Bank of India during the 1991 balance of payments crisis? → S. Venkitaramanan