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What were the main reasons behind the Liberalization of Economy or Economic reforms 1991?

1. Huge External Debt and the rise in Fiscal Deficit.

2. Rising prices of essential goods.

3. Balance of payment crisis.

4. Iraq War.


1. 1, 2 and 3 
2. 2, 3 and 4
3. 1, 3 and 4
4. All of the above

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Correct Answer - Option 4 : All of the above

The correct answer is All of the above.

  • The government introduced a new set of policy measures in the form of LPG (Liberalization, Privatization, and Globalization) reforms that changed the direction of our developmental strategies
  • Reasons behind the 1991 economic reforms:
    • Inefficient management of the Indian economy in the 1980s
    • The inflation rate increased to around 16.7% due to the rapid increase in the money supply.
    • Rise in Fiscal Deficit due to the increase in non-development expenditure resulting in a rise of public debt and interest. Hence, Statement 1 is correct.
    • Interest liability became 36.4% of total government expenditure
    • Increase in adverse Balance of Payments. Hence, Statement 3 is correct.
    • Rising prices of essential goods. Hence, Statement 2 is correct.
    • Iraq War in 1990-91 led to a rise in petrol prices. The flow of foreign currency from Gulf countries stopped and this further aggravated the problem. Hence, Statement 4 is correct.
    • The dismal Performance of PSUs due to political interference and became a big liability for the government.
    • India’s foreign exchange reserve fell to a low ebb in 1990-91 and it was insufficient to pay for an import bill for 2 weeks. 

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