CA Foundation · Business Economics · Indian Economy
Which of the following was a major immediate cause of the 1991 balance of payments crisis in India?
A key cause was the collapse of foreign exchange reserves to a level covering only a few weeks of imports. High fiscal deficits, the Gulf War oil price shock and reduced remittances worsened the position, forcing India to pledge gold and begin structural reforms.
- AVery large foreign exchange reserves leading to inflation
- BForeign exchange reserves falling to a level sufficient for only a few weeks of importsCorrect
- CComplete ban on all exports
- DSurplus in the government's fiscal deficit
Explanation
By mid-1991 reserves had fallen so low that they could finance only roughly two to three weeks of imports, due to high fiscal deficits, rising oil prices from the Gulf War and falling remittances. Fiscal surplus did not exist; deficits were high.
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