Question : What was the primary reason for the balance of payments crisis in India before liberalization?
Option 1: Low domestic savings
Option 2: High foreign exchange reserves
Option 3: Declining population growth
Option 4: Excessive government spending
Correct Answer: Excessive government spending
Solution : The correct answer is (d) Excessive government spending
Before the liberalization era, India faced a balance of payments crisis primarily due to excessive government spending. The government's extensive control over the economy, coupled with a focus on import substitution industrialization, led to a situation where the country's expenditures exceeded its earnings from exports and other sources.
The government implemented policies that favored import substitution, heavily regulated foreign trade, and imposed high tariffs and trade barriers. This resulted in limited export earnings and a reliance on imports, leading to a growing current account deficit.
The balance of payments crisis highlighted the need for economic reforms, which ultimately led to the initiation of liberalization policies in India in the early 1990s. The liberalization measures aimed to address the root causes of the crisis, including excessive government spending, by opening up the economy, promoting exports, attracting foreign investments, and adopting market-oriented policies.
