Descriptive ESI Question: RBI Grade B 2023 – MODEL ANSWER
What were the structural Reform measures taken in 1991 to end BoP crises in India?
India experienced a balance of payments (BoP) crisis in 1991 due to a significant current account deficit, low foreign exchange reserves, and a high fiscal deficit. To resolve this crisis, the government implemented various structural reforms, which are discussed below.
- Liberalization: The government introduced a policy of liberalization, which opened up the Indian economy to foreign investment and trade. This led to an increase in foreign capital inflows, which helped in increasing foreign exchange reserves. The government also reduced import tariffs, which led to increased competition and improved efficiency.
- Privatization: The government initiated the privatization of state-owned enterprises, which helped in reducing the fiscal deficit and improving efficiency. The process of privatization was gradual and selective, and only non-strategic sectors were opened up for private investment.
- Devaluation of the rupee: To address the overvaluation of the rupee, the government devalued the rupee by 18-19% against the US dollar. This helped in making exports more competitive and reducing the current account deficit.
- Fiscal Consolidation: The government introduced measures to reduce the fiscal deficit, such as reducing subsidies, increasing tax revenues, and reducing non-plan expenditure. This helped in reducing the pressure on the balance of payments and improving investor confidence.
- Financial sector reforms: The government introduced several financial sector reforms, including the creation of the Securities and Exchange Board of India (SEBI), which helped in improving investor confidence and promoting transparency in the capital markets. The government also allowed private banks to enter the banking sector, which led to increased competition and improved efficiency.
- Industrial policy reforms: The government introduced various industrial policy reforms, such as delicensing and deregulation of industries, which helped in reducing bureaucratic red tape and improving efficiency. The government also allowed foreign investment in several key sectors, which helped in improving productivity and competitiveness.
- Exchange rate management: The government introduced a managed float exchange rate regime, which allowed the rupee to float within a range determined by market forces. This helped in reducing the volatility of the exchange rate and improving investor confidence.
In conclusion, the structural reforms undertaken by the Indian government in 1991 helped in resolving the balance of payments crisis and laying the foundation for sustained economic growth in the subsequent years. The reforms led to increased foreign investment and trade, improved efficiency and productivity, and greater investor confidence. The government’s policy of liberalization, privatization, and globalization opened up the Indian economy to the world, leading to unprecedented growth and development.