With reference to the economic crisis of 1991 in India, consider the following statements: 1. The crisis was triggered because the government was unable to make repayments on its borrowings from abroad. 2. Foreign exchange reserves were sufficient for more than a year of imports. 3. The crisis was compounded by rising prices of essential goods. Which of the statements given above is/are correct?

The correct option is 1 and 3 only Explanation The economic crisis of 1991 in India was primarily a Balance of Payments (BoP) crisis. It was characterized by a severe liquidity crunch where the government faced an imminent default on its external debt obligations and a critical depletion of foreign exchange reserves, necessitating immediate structural reforms. Statement-wise Analysis - Statement 1 is Correct: The crisis was triggered because the Government of India was unable to make repayments on its borrowings from abroad. The fiscal deficit was high, and the country faced a sovereign default situation, forcing it to approach international institutions like the IMF and the World Bank for a bailout. - Statement 2 is Incorrect: Foreign exchange reserves were critically low during this period. They were not sufficient for more than a year of imports; rather, they had depleted to a level sufficient to finance imports for only about two weeks (a fortnight). This scarcity led to the immediate need to pledge gold reserves to secure foreign exchange. - Statement 3 is Correct: The crisis was compounded by rising prices of essential goods. The annual rate of inflation reached double digits (peaking around 16.7% in August 1991), which eroded the purchasing power of the common people and added domestic instability to the external sector crisis. Key Takeaway: The 1991 crisis was a convergence of a Balance of Payments deficit (inability to service debt and pay for imports) and high domestic inflation, which collectively necessitated the introduction of the New Economic Policy (LPG Reforms).

NCERT Class 11 Economics — Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

mcqmedium

With reference to the economic crisis of 1991 in India, consider the following statements:

The crisis was triggered because the government was unable to make repayments on its borrowings from abroad.
Foreign exchange reserves were sufficient for more than a year of imports.
The crisis was compounded by rising prices of essential goods.

Which of the statements given above is/are correct?

Official previous-year question

Verified 1 Aug 2026.

Options

A1 and 2 only
B2 only
C1, 2 and 3
D1 and 3 only

Did you get this right?

Solution

The correct option is 1 and 3 only

Explanation

The economic crisis of 1991 in India was primarily a Balance of Payments (BoP) crisis. It was characterized by a severe liquidity crunch where the government faced an imminent default on its external debt obligations and a critical depletion of foreign exchange reserves, necessitating immediate structural reforms.

Statement-wise Analysis

Statement 1 is Correct: The crisis was triggered because the Government of India was unable to make repayments on its borrowings from abroad. The fiscal deficit was high, and the country faced a sovereign default situation, forcing it to approach international institutions like the IMF and the World Bank for a bailout.
Statement 2 is Incorrect: Foreign exchange reserves were critically low during this period. They were not sufficient for more than a year of imports; rather, they had depleted to a level sufficient to finance imports for only about two weeks (a fortnight). This scarcity led to the immediate need to pledge gold reserves to secure foreign exchange.
Statement 3 is Correct: The crisis was compounded by rising prices of essential goods. The annual rate of inflation reached double digits (peaking around 16.7% in August 1991), which eroded the purchasing power of the common people and added domestic instability to the external sector crisis.

Key Takeaway: The 1991 crisis was a convergence of a Balance of Payments deficit (inability to service debt and pay for imports) and high domestic inflation, which collectively necessitated the introduction of the New Economic Policy (LPG Reforms).

Your note

More from Chapter 3: Liberalisation, Privatisation and Globalisation: An Appraisal

Consider the following statements regarding the deregulation of the industrial sector under the 1991 reforms: 1. Industrial licensing was abolished for all product categories without exception. 2. Industries reserved for the public sector were reduced to only a part of atomic energy generation and some core activities in railway transport. 3. The market was allowed to determine prices in most industries. Which of the statements given above is/are correct?

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With reference to the 'Outsourcing' phenomenon under globalisation, consider the following statements: 1. It involves a company hiring regular services from external sources which were previously provided internally. 2. The growth of outsourcing is primarily driven by the stagnation of the manufacturing sector in developed countries. 3. India has become a destination for outsourcing due to low wage rates and the availability of skilled manpower. Which of the statements given above is/are correct?

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With reference to the trade policy reforms initiated in 1991, consider the following statements: 1. Quantitative restrictions on imports of manufactured consumer goods were fully removed immediately in 1991. 2. Export duties were removed to increase the competitive position of Indian goods in international markets. 3. Import licensing was abolished except for hazardous and environmentally sensitive industries. Which of the statements given above is/are correct?

hard

Consider the following statements regarding the performance of the agriculture sector during the reform period: 1. Public investment in the agriculture sector has declined in the reform period. 2. The removal of fertiliser subsidy has decreased the cost of production for farmers. 3. There has been a shift from export market production to domestic market production. Which of the statements given above is/are correct?

medium

Consider the following statements regarding the industrial sector performance during the reform period: 1. The industrial growth has recorded a slowdown due to cheaper imports replacing the demand for domestic goods. 2. Infrastructure facilities became world-class due to massive investment. 3. Developing countries like India have not gained sufficient access to developed markets. Which of the statements given above is/are correct?

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The correct option is 1 and 3 only

Explanation

Statement-wise Analysis

Statement 1 is Correct: The crisis was triggered because the Government of India was unable to make repayments on its borrowings from abroad. The fiscal deficit was high, and the country faced a sovereign default situation, forcing it to approach international institutions like the IMF and the World Bank for a bailout.
Statement 2 is Incorrect: Foreign exchange reserves were critically low during this period. They were not sufficient for more than a year of imports; rather, they had depleted to a level sufficient to finance imports for only about two weeks (a fortnight). This scarcity led to the immediate need to pledge gold reserves to secure foreign exchange.
Statement 3 is Correct: The crisis was compounded by rising prices of essential goods. The annual rate of inflation reached double digits (peaking around 16.7% in August 1991), which eroded the purchasing power of the common people and added domestic instability to the external sector crisis.