Question

(b)(i) "After 1991, reforms in the external sector led to an increase in foreign exchange inflows". Justify the given statement with a valid argument.

Hint:

Economic liberalization, particularly in the external sector, helps increase foreign exchange reserves, strengthens the currency, and boosts international trade.

Answer 1

The economic reforms initiated in 1991, particularly in the external sector, were aimed at liberalizing trade, increasing foreign investments, and stabilizing the Indian economy. Some key reforms that contributed to the increase in foreign exchange inflows include:
1. Devaluation of the Rupee: This made Indian exports cheaper and more competitive in international markets, leading to an increase in export revenues and foreign exchange inflows.
2. Relaxation of Foreign Direct Investment (FDI) Norms: By allowing more foreign investment, India attracted significant FDI, boosting foreign exchange reserves.
3. Trade Liberalization: The reduction of tariffs and import restrictions encouraged foreign businesses to invest in India, leading to a higher inflow of foreign currency.