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Question

Difficulty: MediumIndustrial Policies, Infrastructure Sector, Balance of Payments, and External Trade

Arrange the following key milestones in India's external sector and exchange rate reforms in chronological order from the earliest to the latest:

  1. 1Devaluation of the Indian Rupee during the post-independence era
  2. 2Introduction of the Liberalised Exchange Rate Management System (LERMS)
  3. 3Establishment of full convertibility of the Indian Rupee on the Current Account
  4. 4Enactment of the Foreign Exchange Management Act (FEMA) replacing FERA

Answer

The correct chronological sequence is: Devaluation of the Indian Rupee (1966), followed by the introduction of LERMS (1992), establishment of full current account convertibility (1994), and enactment of FEMA (1999).
The milestone events occurred in the following chronological sequence: (1) Devaluation of the Indian Rupee took place in 1966 under economic distress; (2) The Liberalised Exchange Rate Management System (LERMS) was instituted in March 1992 post-1991 economic crisis; (3) Full current account convertibility was accepted in August 1994; and (4) The Foreign Exchange Management Act (FEMA) was passed in 1999 to replace the draconian FERA 1973 framework.

Step-by-Step Solution

1
Identify the historical year of the post-independence Rupee devaluation.
The major post-independence devaluation occurred in June 1966.
This addressed severe trade deficits and macroeconomic imbalances in the mid-1960s.
2
Identify the launch year of LERMS.
The Liberalised Exchange Rate Management System (LERMS) was introduced in March 1992.
It served as a transitional dual exchange rate arrangement leading toward market-determined exchange rates.
3
Identify the year India achieved full current account convertibility.
India made the Rupee fully convertible on current account transactions in August 1994.
This complied with Article VIII obligations of the International Monetary Fund (IMF).
4
Identify the enactment year of FEMA.
The Foreign Exchange Management Act (FEMA) was passed in 1999.
FEMA replaced the restrictive Foreign Exchange Regulation Act (FERA) of 1973 to facilitate external trade and payments.

Key Concept

Chronological evolution of India's external trade policy and exchange rate management regime
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Topics

Industrial Policies, Infrastructure Sector, Balance of Payments, and External Trade