Since July 1991, comprehensive liberalization measures have been undertaken to improve the supply side of the economy. Among these the more important are :
a. Trade and capital flows reforms
b. Indust

Question

Since July 1991, comprehensive liberalization measures have been undertaken to improve the supply side of the economy. Among these the more important are :
a. Trade and capital flows reforms
b. Industrial deregulation
c. Disinvestment and Public Enterprises Reforms
d. Financial sector reforms

UnlockIAS · Accepted Answer

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.

Why the other options are wrong — (a) 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.  (b) 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.  (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.

Concept: 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.

State PCS 2023 Q52 — Economy PYQ with Answer

State PCS 2023 Q52 — Economy PYQ with Answer