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SSC CHSL 2025 PYQ — Question 94

SSC CHSL - 17 Nov 2025 - Shift 2 • General Awareness • Q94

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What was the primary cause of India's 1991 economic crisis?

Show answer & explanation

Correct answer: B

Explanation

The correct answer is Option 2: The government's inability to repay foreign loans.
Explanation:

  • The economic crisis of 1991 was the most severe Balance of Payments (BoP) crisis in India's history. Its primary cause was that India no longer possessed sufficient foreign exchange reserves to repay its foreign debts and import essential commodities (such as crude oil).

Key Highlights of the Crisis:

  • Depletion of Foreign Exchange Reserves: India was left with only enough foreign exchange reserves to cover imports for a mere two weeks.
  • The Gulf War: Due to the Gulf War of 1990–91, crude oil prices skyrocketed, causing India's import bill to rise significantly.
  • High Fiscal Deficit: Government expenditure far exceeded its revenue, and the burden of foreign debt continued to mount steadily.
  • Inflation: The rate of inflation within the country had surged to very high levels, thereby increasing the financial burden on the general public.

Resolution of the Crisis and the LPG Reforms (Quick Revision):

  • As you prepare for SSC, RRB, and banking examinations, it is crucial to understand the historic reforms that followed this crisis:
  • New Economic Policy (NEP): The then-Prime Minister P.V. Narasimha Rao and Finance Minister Dr. Manmohan Singh announced the New Economic Policy in July 1991.
  • LPG Reforms:
  • L – Liberalization: Abolishing the 'License Raj' and simplifying business regulations.
  • P – Privatization: Enhancing the role of the private sector within Public Sector Undertakings (PSUs).
  • G – Globalization: Integrating the Indian economy with the global economy.
  • Pledging of Gold: To tackle the crisis, India was compelled to pledge its gold reserves with the Bank of England and the Bank of Switzerland in order to secure a loan from the IMF.

Important Questions for Upcoming Examinations:
Question: Who was the Prime Minister of India at the time of the 1991 economic reforms?
Answer: P.V. Narasimha Rao.
Question: What is the full form of the 'LPG' model?
Answer: Liberalization, Privatization, and Globalization.
Question: Who is known as the 'Father of Economic Reforms' in India?
Answer: Dr. Manmohan Singh.