CUET UG Economics: Indian Economic Development - Economic Reforms, 1991, LPG, WTO, GST, Demonetisation

Must-Know (15–20 detailed bullets)

• India faced a Balance of Payments (BoP) crisis in 1991 with foreign exchange reserves falling to $1.2 billion, barely enough to cover three weeks of imports (verify from NCERT).
• The New Economic Policy (NEP) 1991 introduced Liberalisation, Privatisation, and Globalisation (LPG) as its core strategy to reform the Indian economy.
• Dr. Manmohan Singh, then Finance Minister, is widely credited as the architect of the 1991 economic reforms.
• Liberalisation involved dismantling the License Raj, removing industrial licensing for all industries except five (e.g., alcohol, cigarettes, defense equipment).
• Privatisation aimed to reduce the role of the public sector by disinvesting in Public Sector Undertakings (PSUs); the government set up the Disinvestment Commission in 1996 (verify from NCERT).
• Globalisation encouraged foreign investment through FEMA (1999), replacing FERA, to facilitate external trade and payments.
• The Foreign Exchange Management Act (FEMA) was enacted in 1999 to replace FERA and promote foreign trade by easing foreign exchange regulations.
• The World Trade Organization (WTO) was established on January 1, 1995, replacing GATT, and India is a founding member.
• India’s tariff rates were reduced from over 80% in 1991 to around 10–12% by 2000s as part of WTO commitments (verify from NCERT).
• The WTO’s Agreement on Agriculture (AoA) covers domestic support, export subsidies, and market access for agricultural products.
• GST (Goods and Services Tax) was introduced on July 1, 2017, via the 101st Constitutional Amendment Act, 2016.
• GST is a destination-based, dual tax system with CGST (Central) and SGST (State) levied on intra-state supply, and IGST on inter-state supply.
• The GST Council, chaired by the Union Finance Minister, makes decisions on tax rates, exemptions, and thresholds; votes are weighted (Centre: 1/3, States: 2/3).
• The dual control structure under GST means both Centre and States have jurisdiction over taxpayers, but disputes are resolved by the GST Council.
• Demonetisation was announced on November 8, 2016, by Prime Minister Narendra Modi, invalidating ?500 and ?1000 notes of the Mahatma Gandhi Series.
• The primary objectives of demonetisation were to curb black money, counterfeit currency, and terrorism financing.
• After demonetisation, ?15.41 lakh crore (99.3% of demonetised notes) was deposited in banks, raising questions about its effectiveness in eliminating black money (verify from NCERT).
• The Goods and Services Tax Network (GSTN) is a non-profit, private limited company set up to provide IT infrastructure for GST implementation.
• The base year for calculating GDP at constant prices was shifted from 2004–05 to 2011–12 in 2015, aligning with the new GDP estimation methodology (verify from NCERT).
• The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, aimed to eliminate revenue deficit and reduce fiscal deficit to 3% of GDP (target year extended multiple times).

Difficulty Level

Intermediate — Requires understanding of policy shifts, dates, and institutional mechanisms; some numerical data and constitutional amendments are fact-intensive.

Common CUET Traps (3 bullets)

• Trap: Confusing FEMA with FERA as being more restrictive.
  Avoid: FEMA (1999) replaced FERA (1973) to liberalise foreign exchange rules; FERA was restrictive, FEMA is facilitative.

• Trap: Believing GST was implemented in 2016.
  Avoid: The 101st Constitutional Amendment Act was passed in 2016, but GST was implemented on July 1, 2017.

• Trap: Assuming WTO replaced GATT abruptly in 1994.
  Avoid: GATT (1947) was a provisional agreement; WTO was formally established on January 1, 1995, after the Uruguay Round (1986–1994) concluded.

Practice MCQs (5 questions)

Q1. Which of the following was NOT a feature of the 1991 economic reforms?
A. Abolition of industrial licensing for most industries
B. Introduction of Goods and Services Tax
C. Reduction of import tariffs
D. Encouragement of foreign direct investment

Answer: B
Explanation: GST was introduced in 2017, not part of the 1991 reforms.
Why others fail: Option A is correct (liberalisation), so students may overlook the timeline and pick it as wrong.

Q2. The 101st Constitutional Amendment Act is related to:
A. Demonetisation
B. GST implementation
C. FRBM targets
D. Disinvestment policy

Answer: B
Explanation: The 101st Amendment introduced GST by inserting Articles 246A, 269A, and 279A in the Constitution.
Why others fail: Option A (demonetisation) is often linked to constitutional change, but it required no amendment.

Q3. Which body makes recommendations on tax rates and exemptions under GST in India?
A. NITI Aayog
B. Finance Commission
C. GST Council
D. Reserve Bank of India

Answer: C
Explanation: The GST Council, chaired by the Union Finance Minister, decides on tax slabs, exemptions, and thresholds.
Why others fail: NITI Aayog is a policy think tank, not a tax authority; students may confuse advisory bodies.

Q4. When was the World Trade Organization (WTO) officially established?
A. 1947
B. 1991
C. 1995
D. 2001

Answer: C
Explanation: WTO was established on January 1, 1995, after the Uruguay Round concluded.
Why others fail: Option A refers to GATT, which students often conflate with WTO.

Q5. Which of the following correctly describes the revenue sharing mechanism in the GST Council?
A. Equal voting rights for all members
B. Centre has 50% voting power, States collectively 50%
C. Centre has one-third weightage, States have two-thirds collectively
D. Decision by simple majority of attending members

Answer: C
Explanation: The GST Council uses weighted voting: Centre has 1/3rd, all States together have 2/3rd of total votes.
Why others fail: Option A seems democratic but is incorrect; students often assume equal voting.

Last?Minute Revision (15–20 one?liners)

• LPG reforms began in 1991 due to BoP crisis; Manmohan Singh was Finance Minister.
• FEMA (1999) replaced FERA (1973) to liberalise foreign exchange.
• WTO established on Jan 1, 1995; India is a founding member.
• GST implemented on July 1, 2017 via 101st Constitutional Amendment.
• GST Council: Union FM chairperson, members from all states, weighted voting (1/3, 2/3).
• IGST applies on inter-state supply; CGST + SGST on intra-state.
• GSTN is a non-profit IT platform, not a government department.
• Demonetisation date: November 8, 2016; ?500 & ?1000 notes invalidated.
• Post-demonetisation, 99.3% of scrapped notes returned to banking system.
• Disinvestment Commission set up in 1996 to advise on PSU sales.
• Uruguay Round (1986–1994) led to WTO creation.
• AoA = Agreement on Agriculture under WTO covers domestic support, market access, export subsidies.
• Pre-1991, industrial licensing under Industrial Development (Regulation) Act, 1951.
• FRBM Act, 2003 aimed for 3% fiscal deficit target.
• Base year for GDP: changed from 2004–05 to 2011–12 in 2015.
• Special Economic Zones (SEZs) promoted under globalisation to boost exports.
• Trade deficit = Value of imports > value of exports.
• Current account includes trade in goods, services, and transfer payments.
• Capital account includes FDI, FII, external loans.
• Veto power in WTO: No single country has veto; decisions by consensus.