MPSC 2023 Prelims Paper-I · Question 52 of 100

Correct — option (4), 'a, b, c and d'. The four statements printed are the standard four-part description of the reforms begun in July 1991, and each names a different set of controls that was loosened. Statement a., trade and capital flow reforms, covers the dismantling of the import licensing regime, the steep reduction of tariff rates from their pre-reform peaks, the two-step devaluation of the rupee at the start of July 1991 and the move towards a market-determined exchange rate, the acceptance of full convertibility on the current account in August 1994, and the opening of the economy to foreign direct and portfolio investment. Statement b., industrial deregulation, refers to the New Industrial Policy announced on 24 July 1991, which abolished industrial licensing for all but a short reserved list, removed the requirement that large firms obtain prior approval for expansion under the monopolies legislation, and cut back the list of industries reserved exclusively for the public sector. Statement c., disinvestment and public enterprise reform, covers the sale of minority and later majority stakes in central public sector undertakings, begun in 1991-92, and the wider effort to make those undertakings answerable for their performance, which produced the Disinvestment Commission in 1996 and eventually a separate department for the purpose. Statement d., financial sector reforms, follows the recommendations of the Narasimham Committee of 1991 and its successor of 1998: prudential norms and capital adequacy requirements for banks, the reduction of the statutory pre-emption of bank funds through the cash reserve and statutory liquidity ratios, the entry of private banks, the deregulation of interest rates, and the placing of the Securities and Exchange Board of India on a statutory footing in 1992. All four belong to the reform programme, so option (4) is the answer. Note that the stem describes these as supply-side measures, which is the right description: each removes a constraint on production, entry or investment rather than adding to demand. This question prints no closing 'which of the statements' line; the four choices follow the list directly.

• (1)a and b — This option keeps the two reforms that faced outward and towards industry — trade and capital flows, and industrial deregulation — and drops the two that concerned the state's own institutions. The division has a certain logic, since the first two were announced within days of the crisis and are what most accounts of 1991 lead with, but it is not a division the reform programme itself made. Disinvestment began in the very first year, 1991-92, and the Narasimham Committee on the financial system was appointed in 1991 as well, so both of the discarded items were under way from the beginning rather than added later. A candidate who selects this option has probably equated liberalisation with the removal of the licence-permit system and the opening of trade, which is the most visible part of the programme but not the whole of it.
• (2)c and d — This option is the mirror image of the first, keeping disinvestment and financial sector reform while discarding trade and industrial deregulation, and it is the harder of the two to defend. The abolition of industrial licensing under the New Industrial Policy of 24 July 1991 and the dismantling of import controls are the measures that gave the reforms their name; a description of liberalisation that omits both has left out its centre. The option may attract a candidate who reads the phrase 'supply side' narrowly as referring to the financing of production, but supply-side measures in this context means anything that relaxes a constraint on producing, entering or investing, and the removal of a licensing requirement is the clearest example of such a measure there is.
• (3)a, b and c — This is the most attractive wrong answer, because it accepts three of the four and drops only financial sector reform, the component that is least often narrated as part of the 1991 story. That omission cannot be sustained. The Narasimham Committee was appointed in 1991 and reported the same year, and its recommendations reshaped Indian banking through prudential norms, capital adequacy, the progressive reduction of the cash reserve and statutory liquidity ratios, the deregulation of interest rates and the licensing of private banks; the Securities and Exchange Board of India was given statutory powers in 1992. These changes belong to the supply side in the strictest sense, since a financial system that cannot price or allocate credit is itself a constraint on production, and a firm freed from licensing but unable to borrow has gained little.

The 1991 reforms are usually summarised as liberalisation, privatisation and globalisation, and the four components in this question map onto that summary: industrial deregulation and financial reform are the liberalising measures, disinvestment is the privatising measure, and trade and capital flow reform is the globalising one. The occasion was a balance of payments crisis in which foreign exchange reserves fell to a few weeks of imports and gold had to be pledged abroad, but the diagnosis went beyond the emergency: the controls built up over four decades were held to have produced an industrial structure protected from competition, insulated from imports, starved of capital and unresponsive to demand. The reforms were therefore described as supply-side, because they worked by removing constraints on producing rather than by stimulating spending — a licence no longer required, a tariff reduced, a stake sold, an interest rate freed. Stabilisation measures to close the immediate external and fiscal gap ran alongside them, and it is worth keeping the two apart: devaluation and fiscal correction were stabilisation, while the dismantling of licensing and the opening of the financial sector were structural reform, and the second was intended to outlast the crisis that occasioned the first.

The 1991 reforms are among the most heavily examined topics in MPSC's economy section, and the Commission tests them at several levels: the components, as here; the specific instruments, such as the abolition of licensing or the reduction of public sector reservation; the institutions and committees, particularly Narasimham for banking and the Disinvestment Commission; and the personalities and dates. This item is a list-recognition question, and the discipline it needs is the same as for any 'all of the above' choice: reach the verdict by testing each statement rather than by weighing how the option looks. There is a further habit worth building on reform questions, which is to ask of each measure what constraint it removed. Doing so makes the four components memorable as a set rather than as a list, and it also protects against the commonest confusion in this territory, which is between the stabilisation measures of 1991 — devaluation, fiscal correction, the IMF arrangement — and the structural reforms that followed, since only the second are what the stem means by liberalisation of the supply side.

• The reforms begun in July 1991 are conventionally described under four heads: trade and capital flow reforms, industrial deregulation, disinvestment and public enterprise reform, and financial sector reforms.
• The New Industrial Policy of 24 July 1991 abolished industrial licensing for all but a short reserved list, removed the requirement of prior approval for expansion by large firms, and reduced the list of industries reserved for the public sector.
• Trade and external sector reform included the two-step devaluation of the rupee at the beginning of July 1991, the dismantling of import licensing, sharp reductions in tariff rates, and full convertibility on the current account from August 1994.
• Financial sector reform followed the Narasimham Committee appointed in 1991 and its successor of 1998, and produced prudential norms and capital adequacy requirements, reductions in the cash reserve and statutory liquidity ratios, deregulated interest rates and the entry of private banks.
• Disinvestment of central public sector undertakings began in 1991-92, and the institutional machinery for it developed through the Disinvestment Commission set up in 1996 and later a dedicated department of government.

• Equating liberalisation with industrial and trade reform alone and leaving out the financial sector, which was reformed from 1991 as well
• Confusing the stabilisation measures of 1991 such as devaluation and fiscal correction with the structural reforms that make up the supply-side programme
• Reading 'supply side' too narrowly, when it covers any measure that relaxes a constraint on producing, entering or investing
• Treating 'all of the above' as an option to be avoided rather than as a verdict reached by testing every statement

The 1991 reforms come up in MPSC papers as a components list, as a chronology asking what happened in which year, as an institution question naming a committee and asking what it examined, and as a policy question asking what a particular measure abolished or permitted. The Commission also likes to test whether a candidate can separate the crisis response from the reform programme, since both belong to the same few months of 1991 but answer different questions. A compact preparation holds the four components with one instrument each, the three or four dates that anchor the sequence, and the two Narasimham reports, and that will answer most variants of the question without further reading.

No directly related past PYQ was found.

• practice — not a real PYQ

  The New Industrial Policy announced in July 1991 made which of the following changes to India's industrial regime ?

  • (a)It extended industrial licensing to all manufacturing industries
  • (b)It abolished industrial licensing except for a short reserved list of industries
  • (c)It reserved all heavy industry for the public sector
  • (d)It prohibited foreign direct investment in manufacturing

  Answer(b) It abolished industrial licensing except for a short reserved list of industries — the same policy also removed the requirement that large firms obtain prior approval for expansion under the monopolies legislation and cut back the list of industries reserved exclusively for the public sector. The direction of every one of these changes was towards fewer restrictions on entry and expansion, which is what makes them supply-side measures.

• practice — not a real PYQ

  The reform of the Indian banking system after 1991, including prudential norms, capital adequacy requirements and the entry of private banks, followed the recommendations of which committee ?

  • (a)The Rangarajan Committee
  • (b)The Narasimham Committee
  • (c)The Kelkar Committee
  • (d)The Tendulkar Committee

  Answer(b) The Narasimham Committee — appointed in 1991 on the financial system and followed by a second committee under the same chairman in 1998 on banking sector reforms, it recommended the prudential and capital adequacy framework, the reduction of statutory pre-emptions on bank funds, deregulated interest rates and competition from private banks. The Rangarajan Committee of 2014 dealt with poverty measurement and the Tendulkar Committee with the poverty line, which are different subjects altogether.