Previous Year Question

The economic reforms of 1991 were introduced against the background of a severe macroeconomic and Balance of Payments crisis. In his Budget Speech of 24 July 1991, Finance Minister Dr. Manmohan Singh described the Balance of Payments position as precarious, noted major fiscal imbalances, and stated that India's foreign-exchange reserves were sufficient to finance only about two weeks of imports. Thus, the foreign-exchange crisis was a direct and well-documented background to the 1991 reforms.

A major exchange-rate adjustment was also undertaken. According to the Government of India's Economic Survey 1991-92, the external value of the Indian Rupee was reduced by about 18% in two stages on 1 and 3 July 1991. This devaluation was part of the policy response intended to address external-sector difficulties and improve competitiveness.

However, an important factual qualification is necessary. The rupee devaluation in July 1991 was not simply an underlying “problem”; it was also a policy measure adopted in response to the crisis. Similarly, “collapse of economic policy” is not a standard technical economic term. Therefore, while the book gives (B) All of these as the expected answer, the wording of the question and options is economically imprecise. The clearest documented background to the reforms was the Balance of Payments crisis, critically low foreign-exchange reserves, fiscal imbalance, and broader macroeconomic instability.