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Question

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

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

  1. 1Two-stage devaluation of the Indian Rupee to address the Balance of Payments crisis
  2. 2Introduction of the Liberalized Exchange Rate Management System (LERMS)
  3. 3Full convertibility of the Indian Rupee on the Current Account
  4. 4Submission of the first Tarapore Committee Report on Capital Account Convertibility
  5. 5Passage of the Foreign Exchange Management Act (FEMA) by Parliament

Answer

The correct chronological order is: Two-stage devaluation of the Indian Rupee (July 1991) → Introduction of the Liberalized Exchange Rate Management System (LERMS) (March 1992) → Full convertibility of the Indian Rupee on the Current Account (August 1994) → Submission of the first Tarapore Committee Report on Capital Account Convertibility (May 1997) → Passage of the Foreign Exchange Management Act (FEMA) by Parliament (December 1999).
The sequence correctly reflects the economic progression of India's external sector reforms: emergency devaluation in July 1991, dual exchange rate under LERMS in March 1992, IMF Article VIII current account convertibility in August 1994, Tarapore Committee report on capital account convertibility in May 1997, and FEMA passage in December 1999.

Step-by-Step Solution

1
Determine the date of emergency exchange rate adjustments during the crisis.
The two-stage devaluation of the Rupee occurred on July 1 and July 3, 1991.
This was an immediate stabilization measure undertaken to halt foreign exchange reserve depletion.
2
Trace the transition from fixed/managed rates to current account convertibility.
LERMS was introduced in March 1992 (creating a 40:60 dual exchange rate structure), followed by official full current account convertibility under IMF Article VIII in August 1994.
LERMS served as a transitional step toward exchange rate unification (March 1993) and eventual current account convertibility.
3
Establish the chronology for capital account reforms and regulatory replacement.
The S.S. Tarapore Committee on Capital Account Convertibility submitted its first report in May 1997, and Parliament passed FEMA in December 1999.
The exploration of capital account openness preceded the legislative replacement of FERA with FEMA.

Key Concept

Chronological evolution of India's exchange rate policy, convertibility framework, and external sector legislation.
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Topics

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