MCQ ECONOMIC REFORMS SINCE 1991 (NEW ECONOMIC POLICY)

1. Read the following statements- Assertion (A) and Reason (R). Choose the correct alternative given below: 

Assertion (A): World Trade Organization (WTO) is expected to establish the rule-based trading regime, to avoid unilaterally placed arbitrary restrictions by member nations.

Reason (R): It is imperative to enlarge world production and ensure optimum utilization of world resources along with environmental protection. 

Alternatives: 

(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). 

(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A). 

(C) Assertion (A) is true, but Reason (R) is false. 

(D) Assertion (A) is false, but Reason (R) is true.

2. Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative given below: 

Assertion (A): Goods and Services Tax (GST) was implemented by the Government of India on 8th November, 2016. 

Reason (R): GST was introduced to implement a unified indirect tax system in India. 

Alternatives: 

(A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of the Assertion (A). 

(B) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of the Assertion (A).

(C) Assertion (A) is true, but Reason (R) is false. 

(D) Assertion (A) is false, but Reason (R) is true. 

3. Read the following statements carefully: 

Statement 1: Outsourcing is one of the important outcomes of globalization process. 

Statement 2: Owing to globalization, many Indian companies have expanded their operation abroad. 

In the light of the given statements, choose the correct alternative from the following: 

(A) Statement 1 is true and Statement 2 is false. 

(B) Statement 1 is false and Statement 2 is true. 

(C) Both statement 1 and 2 are true. 

(D) Both statement 1 and 2 are false. 

4. Read the following statements: Assertion (A) and Reason (R). Choose the correct alternative from those given below. 

Assertion (A): In 1991, as an immediate measure to resolve the Balance of Payments crisis, the rupee was devalued 

against foreign currencies.

Reason (R): Devaluation of currency was eminent, to replenish the deteriorated foreign exchange reserves.

Alternatives: 

a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A). 

b) Both Assertion (A) and Reason (R) are true, but Reason (R) is explanation of Assertion (A). 

c) Assertion (A) is true, but Reason (R) is false. 

d) Assertion (A) is false, but Reason (R) is true.

5. Identify, which of the following statement is incorrect about the financial sector reform introduced in 1991? 

(Choose the correct option) 

A. Enabled the establishment of private sector banks, Indian as well as foreign 

B. Foreign investment limit in banks was raised to around 74% 

C. Foreign Institutional Investors were allowed to invest in Indian financial markets 

D. Change in the role of the Reserve Bank of India from facilitator to regulator

6. Identify the incorrect statement from the following: 

(a) Import substitution was the strategy used to save foreign exchange.

(b) License policy ensured regional equality. 

(c) Russian economic model was the base for the Indian economic system. 

(d) Small Scale Industries are one of the essential tools for employment generation. 

7. “Under the liberalisation measures taken by the Government of India, regulation of industrial sector was extremely crucial.” Reject or support the given statement with valid arguments.

Ans. The given statement is rejected. As the liberalisation measures curtailed many restrictions on the Industrial sector y. Industrial licensing was abolished for almost all except for three industries. Many goods produced by Small

Scale Industries were deserved. In most of the industries, market has been allowed to determine the prices

independently. This was necessitated by the slower industrial growth rate under the pre-reform period. (To be marked as a whole)

8. Read the following text carefully and answer the given questions on the basis of the same and common understanding.

 The stabilisation and structural adjustment measures, initiated under the 1991 “Economic Reforms” mark a watershed moment in India’s economic policies. For almost three decades since independence, India’s development strategy and economic policies were guided by the objectives of accelerating the growth of output and employment with social justice and equity. Ever since the 1970’s, it was realised that many of the regulations on economic activities have outlived their usefulness and were in fact hampering economic growth and development. In response to this, the government initiated some milder liberalisation reforms for almost a decade since the early 1980’s.

 However, the Indian economy soon had to face the Gulf crisis and consequently:

(i) The uncertainties about the oil prices;

(ii) The external payment problems;

(iii) The serious inflationary pressures;

(iv) The scarcities of essential commodities;

(v) The deterioration of fiscal discipline, etc. These led to the Indian economy on the verge of Economic crisis.

 In response to this emerging crisis, the Government initiated a set of stabilisation and structural reforms like:

(i) Reduction in fiscal deficit;

(ii)Containment of growth in money supply:

(iii) An exchange rate adjustment system etc.

The key objective of stabilisation policy was to bring the growth of aggregate demand in line with long term growth

path of the economy.

 In conjunction, the structural adjustment measures like;

(i) industrial delicensing

(ii) liberalisation of policy regime governing international trade

(iii) deregulation of financial sector.

Were taken to improve the supply side of the economy. This shifted the long-term growth path of the economy itself completely. (Adapted and modified)

1. Briefly outline any two reasons for the initiation of Economic Reforms in 1991.

Ans. Two reasons for the initiation of economic reforms were:

• High inflationary pressure

• Mounting fiscal deficit

2. Government introduced a set of stabilisation and structural reforms to solve the economic crisis. State the

key initiatives and objectives of these policies adopted by the Government of India.

Ans. In response to the economic crisis, Government of India initiated a set of:

• Stabilization measures like reduction in fiscal deficit, containment of growth in money supply etc.

• Structural reforms such as industrial delicensing, deregulation of financial sector etc.

The key objective of such policies was to bring the growth of aggregate demand in line with long term growth

path of the economy.

8. Discuss any two liberalization measures pertaining to the tax reforms, introduced by the government,

during the economic reform process of 1991.

Ans. Two liberalization measures pertaining to the tax reforms introduced by the government, during the economic

reform process of 1991 were:

• There has been a reduction in taxes as high tax rates were an important reason for tax evasion.

• To encourage better compliance on the part of taxpayers many tax paying procedures have been simplified.

9. Many economists believe that the economic reforms process of 1991 had adversely affected the agricultural sector." Do you agree with the given statement? Quote valid arguments in favour of your answer.

Ans. Yes. The agricultural sector was adversely affected by the reform process as public investment in agriculture sector especially in infrastructure had fallen.

Further, the partial removal of fertiliser subsidy had led to increase in the cost of production, which had severely affected the small and marginal farmers. Moreover, there had been a shift from production for the domestic market towards production for the export market focusing on cash crops putting pressure on prices of food grains.

10. “Trade and Investment Policy of India had undergone comprehensive changes in the post reforms period of 1991.” Do you agree with the given statement? Justify your answer with any two valid arguments.

Ans. Yes. Trade and Investment Policy of India had undergone comprehensive changes in the post reforms period of 1991. Liberalisation of this policy led to an increase in international competitiveness of industrial production and inflow of foreign investments and technology. These policy reforms aimed at dismantling the structure of quantitative restrictions, reducing tariffs and relaxation in licensing procedure in foreign trade. Export duties were rationalised with an objective to promote exports of Indian goods in international markets.

11. Discuss any two liberalisation measures pertaining to the financial sector, introduced by the Government of India during the economic reform process of 1991.

Ans. The financial sector witnessed a major revamp under the economic reform process of 1991. The two main measures in this direction may be quoted as:

• Redefining the role of RBI from regulator to facilitator of the financial sector. It implies that the financial sector could now take decisions on many matters without consulting the RBI.

• The reform policies led to the establishment of private sector banks (Indian as well as foreign). (Any other valid measure to be allotted marks)

12. Explain the reasons why the industrial sector has performed poorly in the reform period(1991).

Ans. Industrial sector performed poorly in the reform period because of decreasing demand for industrial products due to various reasons such as cheaper imports, etc. Cheaper imports have, thus, replaced the demand for domestic goods. Moreover, the infrastructure facilities including power supply, remained inadequate due to lack of investment.

13. Distinguish between the Bilateral and Multilateral Trade.

Ans. Bilateral Trade refers to the exchange of goods and services between two nations. Whereas;

Multilateral Trade refers to exchange of goods and services between more than two nations.

14. Elaborate how the economic reforms process of India impacted the following:

(a) Agriculture sector or 'Agriculture sector has been adversely affected by the Economic reform process.'Comment.

(b) Industrial sector or explain the reasons why the industrial sector has performed poorly in the reform period

Ans. (a) The agricultural sector was adversely affected by the reform process due to reduction in the public investment in agriculture sector especially in infrastructure. Furthermore, the partial removal of fertiliser subsidy had led to increase in the cost of production, which had severely affected the small and marginal farmers.

(b) Industrial sector performed poorly in the reform period as the demand for domestic industrial products decreased due to reasons like cheaper imports, etc. Moreover, the infrastructure facilities including power supply, remained inadequate due to lack of public investment.

15. State the meaning of 'Privatisation'.

Ans. Privatisation refers to shedding of the ownership or management of a government owned enterprise.

16. “Indian economy has certain advantages, which have made it a favourite outsourcing destination.” Do you agree with the given statement? Give valid reasons in support of your answer.

Ans. Yes. In the recent times, India has emerged as a favourite outsourcing destination because of the growth of fast modes of communication, particularly the growth of Information Technology (IT). Furthermore, availability of skilled manpower at a relatively affordable cost has made India a leading outsourcing hub for Multinational Corporations (MNCs) to outsource their services to India.

17. Read the following text carefully and answer the given questions on the basis of the same and common understanding:

India urged the World Trade Organisation (WTO) to relax rules to allow the country to export food grains from its public stocks to the nations facing food crisis. India can help, reduce food insecurity but there is hesitation on the part of the WTO, in relaxing its rules. India's Finance Minister said food, fuel and fertilizers are global public

goods and ensuring access of these for developing and emerging economies is critical. She also shared India's experiences, including robust gains in agriculture production, citizen centric food security programmes and

innovative delivery mechanisms such as the 'One Nation one Ration Card' Scheme. (Source: The Economic Times; July 16, 2022)

Q1. State and discuss any two objectives of World Trade Organisation.

Ans. Objectives of World Trade Organisation (WTO) are:

• It helps in providing greater market access to all member countries as it provides equal opportunities to all countries in the international market.

• It facilitates bilateral and multilateral trade by removing tariff and non-tariff barriers

Q2. Name any two steps taken by India to strengthen the food security.

Ans. Two steps taken by India to strengthen food security are: • Robust gains in agriculture production. •Citizen-centric food security programme.

18. Read the following text carefully:

With the July 1991 budget, there was a clear switch in favour of a move towards an outward oriented, market￾based economy. The liberalisation steps initiated in the budget were very comprehensive although the pace

remained gradual and there were occasional hiccups.

The 1991 reforms did away with import licensing on all but a handful of intermediate inputs and capital goods.

 Consumer goods, accounting for approximately 30% of tariff lines, remained under licensing, only a decade later, after a successful challenge by India’s trading partners at the World Trade Organisation (WTO), were these goods freed of licensing.

 Today, except for a handful of goods that are disallowed on environmental/health/safety grounds, all goods may be imported without a license or other restrictions.

With the removal of licensing, the tariff rates became effective restrictions on imports. Therefore, a major task of the reforms has been to lower the tariff rates. Tariff reductions have been mainly confined to non-agricultural,

industrial goods.

 Therefore, the liberalization applies strictly to these goods. The reduction in tariffs has been achieved through a gradual compression of the tariff rates. A simultaneous rationalization of the tariff structure through a reduction in the number of tariff bands helped in this direction.

On the basis of the given text and common understanding, answer the following questions:

Q1. “The trade liberalization reforms initiated in 1991 budget were very comprehensive.” Justify the given statement explaining any two trade reforms introduced in 1991.

Ans. The comprehensive trade liberalization reforms were initiated in 1991 budget to promote the efficiency of local industries and adoption of modern technologies. Two trade reforms introduced in 1991 were:

 • dismantling

of quantitative restrictions on imports and exports.

 • removal of licensing procedures for imports.

Q2, state any two areas in which tariff reductions were introduced.

Ans. Two areas in which tariff reductions were introduced:

• non-agricultural goods

• industrial goods

19.  “In the post-reform period, the Government of India decided to retain profit-making Public Sector Undertakings (PSUs). It provided a special status to PSUs to enable them to expand in the global market.” Do you agree with the given statement? Give valid reasons in support of your answer.

Ans. Yes. In order to improve efficiency, infuse professionalism and enable Public Sector Undertakings (PSUs) to compete more effectively in the liberalised global environment, the government identified profit making PSUs.

Government declared them as Maharatnas, Navratnas and Miniratnas. PSUs were given greater managerial and operational autonomy, in taking various decisions. As a result, over the years these Maharatnas, Navratnas and Miniratnas have performed exceedingly well and established themselves as market leaders.

20. “In the post-reform period the government of India decided to privatize profit-making Public-Sector Undertakings (PSUs).” Do you agree with the given statement? Give valid arguments in support of your answer.

Ans. No. In the post-reform period, the government of India did not privatize its profit-making Public-Sector Undertakings (PSUs) as they were adding to the government’s revenue. Rather, these PSUs were given greater managerial and operational autonomy, in taking various decisions to improve efficiency, infuse professionalism and enable them to compete more effectively in the liberalised global environment.

20. Critically appraise the disinvestment policy initiated by the government during the reforms of 1991.

Ans. Disinvestment aimed to boost financial discipline and modernisation. The government exceeded its mobilisation target but assets of Public Sector Enterprises (PSEs) had been undervalued, resulting in significant losses to the

government. Moreover, the proceeds were primarily used to cover shortfalls of government revenue instead of investing in social infrastructure or the development of PSE

21. ‘Globalisation is an essential outcome of liberalisation of an economy’. Justify the given statement with a valid explanation.

Ans. Globalisation is indeed an essential outcome of liberalisation of an economy. The removal or reduction of restrictions in the industrial sector, financial sector, trade and investment policy etc. opened the doors of the Indian economy to the rest of the world. Hence, liberalisation acted as a catalyst for globalisation. It fostered international trade integrating the Indian economy with the global economy. 

Answer Keys

1. Ans. (A) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

2. Ans. (D) Assertion (A) is false, but Reason (R) is true.

3. Ans. (C) Both statement 1 and 2 are true.

4. Ans. a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).

5. Ans. D. Change in the role of the Reserve Bank of India from facilitator to regulator

6. Ans. (c) Russian economic model was the base for the Indian economic system

7.