Previous Year Question

In 1991, India introduced the New Economic Policy following a balance-of-payments crisis. Its three principal dimensions were liberalisation, privatisation and globalisation. Reduction in industrial licensing, lowering of trade barriers, exchange-rate reforms and opening the economy to foreign investment were important parts of this policy.

Statement 1 is incorrect. The percentage share of agriculture in GDP did not increase enormously after economic liberalisation; it declined over the long term. This does not necessarily mean that agricultural production declined. The principal reason was that industry, and particularly the services sector, grew faster than agriculture.

Around 1990-91, agriculture and allied sectors accounted for nearly 29% of the Indian economy. By the middle of the 2010s, their share had declined to approximately 17-18%. This is described as a structural transformation of the economy. However, agriculture’s contribution to employment and rural livelihoods remained considerably higher than its share in GDP.

Statement 2 is correct. India’s share in world exports increased because of trade liberalisation, reductions in import tariffs, export promotion, exchange-rate reforms and the integration of Indian producers with global markets.

Around 1990, India accounted for approximately one-half of one per cent of global merchandise exports. By the middle of the 2010s, the share had increased to approximately 1.6-1.7%. Exports of software and other business services also expanded substantially.

Statement 3 is correct. After 1991, several sectors were opened to foreign direct investment. The automatic route was permitted in numerous sectors, foreign-ownership limits were raised and the foreign-exchange management framework was liberalised.

Consequently, FDI inflows increased from extremely low levels in the early 1990s to several tens of billions of US dollars annually during the 2010s. FDI can bring not only capital but also technology, managerial skills, production methods and access to global markets.

Statement 4 is correct. During the 1991 balance-of-payments crisis, India’s foreign-exchange reserves had fallen to a level sufficient to finance approximately two weeks of imports. Foreign currency assets had declined to around US$1.2 billion in January 1991.

Following liberalisation, foreign-exchange reserves increased rapidly because of growth in exports, service receipts, foreign investment, non-resident Indian deposits and capital inflows. By around 2017, India’s total foreign-exchange reserves had exceeded US$350 billion.

Foreign-exchange reserves principally comprise foreign currency assets, gold, Special Drawing Rights—SDRs and the reserve-tranche position in the International Monetary Fund.