Question

Which of the following factors necessitated the need for economic reforms?

Options

• Huge Fiscal Deficit

• Weak BOP Situation

• High level of Inflation

• All of the above

Answer 1

All of the above

Explanation:

The following are the circumstances that made it necessary. the importance of economic changes.

1. Huge Fiscal Deficit:
   Due to large non-development spending, the fiscal imbalance grew during the 1980s. As a result, from 1980-81 to 1990-91, the gross budget deficit increased from 5.7 percent to 6.6 percent of GDP. Following that, borrowings (both external and domestic) were used to cover a large chunk of the deficit.
2. Weak BOP Situation:
   The BOP is the difference between the total amount of exports and the total amount of imports. India was unable to earn enough foreign cash through exports to finance its purchases due to the lack of competitiveness of Indian products. Between 1980-81 and 1990-91, the current account deficit increased from 1.35 percent to 3.69 percent of GDP. The Indian government borrowed a large sum from the international market to pay this massive current account deficit.
3. High level of Inflation:
   The central government was compelled to monetize its budget deficits by borrowing money from the RBI. The Reserve Bank of India issued fresh money, raising inflation and making domestic commodities more expensive. During the 1980s and 1990s, inflation increased from 6.7 percent per year to 10.3 percent per year. In order to reduce inflation, the government in 1991 had no choice but to implement economic changes.