What immediate measure was taken in 1991 to resolve the balance of payments crisis in India?
Show answer & explanation
Correct answer: B
Explanation
The correct answer is Option 2: Devaluation of the rupee against foreign currencies.
Explanation:
During the economic crisis of 1991 (the Balance of Payments crisis), India's foreign exchange reserves had depleted to such an extent that they were sufficient to cover imports for only two weeks. To address this situation, in July 1991, the government and the RBI took the immediate step of devaluing the rupee.
Immediate Action: The devaluation of the rupee was carried out in two phases (July 1 and July 3, 1991). In total, the value of the rupee was reduced by approximately 18% to 20% against major foreign currencies.
Objectives of Devaluation: 1. To Boost Exports: Devaluation made Indian goods cheaper in foreign markets, thereby leading to an increase in exports.
- 2. To Reduce Imports: Foreign goods became more expensive for Indians, resulting in a decline in imports.
- 3. To Attract Foreign Currency: This helped in boosting the inflow of foreign currency into the country.
Other Key Solutions to the 1991 Crisis (LPG Reforms):
- Apart from devaluation, three pillars were adopted under the New Economic Policy (NEP) to provide a long-term solution:
- Liberalization: Abolishing the 'License Raj' and freeing industries from government control.
- Privatization: Promoting private participation in Public Sector Undertakings (PSUs).
- Globalization: Integrating the Indian economy with the global economy.
Additional Information (From an Exam Perspective):
- Pledging of Gold: During the crisis, to preserve its financial credibility, India had to pledge approximately 47 tons of gold with the Bank of England.
- Role of the IMF: India received a bailout package from the International Monetary Fund (IMF); however, this came with the condition of implementing stringent economic reforms.
Important Questions for Upcoming Exams:
Question: Who was India's Finance Minister at the time of the 1991 economic reforms? Answer: Dr. Manmohan Singh.
Question: What is the meaning of the Balance of Payments?
Answer: A statement of all economic transactions between a country and the rest of the world over a specific period.
Question: How many times has the Indian Rupee been devalued so far?
Answer: Three times (1949, 1966, and 1991).