The correct option is 2 only
Explanation
The economic crisis of 1991 was precipitated by fiscal mismanagement during the 1980s. This period was characterized by structural imbalances where the government consistently lived beyond its means, leading to unsustainable fiscal deficits and a severe Balance of Payments (BoP) crisis.
Statement-wise Analysis:
- Statement 1 is Incorrect: During the 1980s, government expenditure began to exceed its revenue by large margins. The government was unable to generate sufficient revenue from internal sources, such as taxation and public sector enterprises, to meet its growing spending requirements, leading to a persistent fiscal deficit.
- Statement 2 is Correct: The government was spending a large share of its income on areas that did not provide immediate financial returns, such as the social sector, national defense, and subsidies. This expenditure was largely consumption-oriented (revenue expenditure) rather than investment-oriented, meaning it did not generate the surplus revenue needed to service the debt.
- Statement 3 is Incorrect: Foreign exchange borrowed from international sources was not strictly invested in high-return capital projects. Instead, a significant portion was utilized to meet consumption needs and bridge the current account deficit. Consequently, these borrowings did not generate sufficient export earnings or financial returns to service the repayment obligations, contributing to the debt trap.
Key Takeaway:
The fiscal crisis of the 1980s arose because public debt was primarily utilized to finance revenue expenditure (consumption) rather than capital expenditure (asset creation), creating a situation where the borrowed funds failed to generate the income required for repayment.