The post-1991 reforms permitted greater inflow of Foreign Direct Investment (FDI) in several sectors. What was the primary objective of this policy shift?
Show answer & explanation
Correct answer: B
Explanation
Solution: The correct answer is To bridge the savings-investment gap and facilitate technology and managerial know-how transfer.
Explanation:
☛ Under the New Industrial Policy announced in July 1991, India opened up its economy to Foreign Direct Investment (FDI) to overcome a severe balance-of-payments crisis.
☛ A primary objective was to overcome the savings-investment gap, as domestic savings alone were insufficient to fund the rapid industrial and infrastructure development required.
☛ Unlike commercial borrowings or external debt, FDI is non-debt creating capital that brings advanced technology, modern managerial practices, and access to international markets.
Extra Exam-Relevant Facts:
☛ Automatic Route: In 1991, automatic approval for FDI up to 51% foreign equity was granted for 34 high-priority industries.
☛ FIPB: The Foreign Investment Promotion Board (FIPB) was constituted in 1991 to clear proposals falling outside the automatic route, and it was officially abolished in May 2017.
☛ Nodal Agency: The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry formulates policies regarding FDI in India.
☛ FDI vs FPI: FDI represents a long-term investment involving management control, whereas Foreign Portfolio Investment (FPI) involves purchasing financial assets like shares without direct managerial control.
Important One-Liners for Upcoming Exams:
☛ Who was the Finance Minister of India when the 1991 economic reforms were introduced? → Dr. Manmohan Singh
☛ Which committee recommended sweeping financial sector reforms in India in 1991? → Narasimham Committee
☛ In which year was the Foreign Investment Promotion Board (FIPB) formally abolished? → 2017
☛ Under which account of the Balance of Payments (BoP) is Foreign Direct Investment recorded? → Capital Account
☛ Which government department is the nodal body for FDI policy formulation in India? → DPIIT (Department for Promotion of Industry and Internal Trade)