Questions and Answers
What was the purpose of devaluing the rupee by 18-19 percent in July 1991?
What was the rate at which customs duty was reduced by 1997-98?
Which system was introduced in 1992-93 to manage exchange rates in India?
What major step was taken to improve India's balance of payments?
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What did the introduction of service tax in 1994-95 contribute to?
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What was the main goal of structural reforms implemented in the economy?
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What percentage of foreign exchange was to be surrendered at the official rate under the dual exchange rate system?
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Which of the following was a consequence of the economic reforms in India?
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Which exchange rate system was adopted in India after the liberalised exchange rate management system?
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What type of foreign investment was encouraged to improve balance of payments?
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Study Notes
Government Finances and Fiscal Deficit
- Long-term financial trend indicated that revenue generation was lower than expenditure, resulting in a fiscal deficit.
- Significant rise in non-development expenditure (interest payments, defense spending, subsidies) contributed to the fiscal imbalance.
- Fiscal deficit escalated to 7.7% of GDP in 1990-91.
- Central government’s internal debt reached 48.6% of GDP due to financing the deficit through borrowings.
- Interest burden on the government soared to 29% of revenue expenditure in 1990-91, creating financial strain.
- High fiscal deficits in the 1980s were pivotal in triggering the 1991 economic crisis.
- A key objective of the New Economic Policy was to reduce the fiscal deficit.
Balance of Payments Crisis
- The Gulf crisis of 1990 led to a pronounced balance of payments crisis, peaking in summer 1991 with foreign exchange reserves dropping to around $1 billion.
- The current account deficit reached $9.7 billion or 3.2% of GDP in 1990-91 due to a surge in oil prices triggered by the Gulf War.
- Diminished remittances from Indian workers in the Gulf exacerbated the invisibles account deterioration.
- Foreign reserves plummeted from $3.1 billion in August 1990 to $896 million by January 1991, largely due to rising imports and falling remittances.
- The crisis was not just from trade deterioration but also reflected loss of confidence in government management, compounded by political instability and high fiscal deficits.
- India struggled to secure foreign loans due to downgrades in its credit rating and simultaneous outflow of non-resident deposits.
- By June 1991, the crisis was characterized as one of confidence, threatening potential default on international payments.
High Inflationary Pressure
- Wholesale prices in India increased at an annual rate of 8.2% from 1981-82 to 1993-94.
- Inflation hit a double-digit rate of 10.2% in 1990-91.
- Corporate tax rates were unified and reduced from 51.75%-57.5% to 35% in 1991-92 to stabilize revenue.
- Maximum customs duty was lowered from 250% to 40% by 1997-98 to enhance trade.
- Introduction of service tax in 1994-95 aimed at broadening the tax base.
- Enhanced tax compliance and stringent public expenditure management led to stabilization of the fiscal deficit.
Balance of Payments Adjustment
- Measures adopted to improve balance of payments included an 18-19% devaluation of the rupee in July 1991, encouraging exports and discouraging imports.
- Liberalized exchange rate management system (LERMS) was introduced in 1992-93, with a dual exchange rate structure.
- Unified exchange rate system implemented in 1993-94, promoting full convertibility in the current account.
- India transitioned to a managed floating exchange rate system.
- Policies were put in place to boost exports and import liberalization for technological upgrades in export sectors.
- Non-debt creating foreign inflows, including foreign direct and portfolio investments, were encouraged to bolster the economy.
Structural Reforms (Supply Side Management)
- Long-term structural reforms aimed at addressing bottlenecks hindering economic growth and enhancing supply of goods and services.
- Reforms targeted removal of obstacles in production, contributing to overall economic stability and efficiency.
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Description
Explore the long-term trends in government finances, focusing on the challenges posed by rising fiscal deficits. This quiz delves into the causes of increased non-development expenditures and their impact on the economy, particularly during the fiscal year 1990-91.
