Question

The Rangarajan committee was appointed to___
(A) To suggest ways for modernisation of textile
(B) To probe share scam
(C) To probe sugar scam
(D) To suggest measures for controlling BOP deficit

Answer 1

Hint: The institutional framework within which the monetary policy operated underwent a far-reaching change. The most important change was the phasing out of the system of issuing accidental treasury bills by the government to the RBI.

Complete answer:
Reforms were a response to the acute economic crisis that India faced in 1991. There is a common thread running through the assorted measures introduced since July 1991, and that is to boost the productivity and efficiency of the system by injecting a greater element of competition.

Under that system, whenever the cash balances of the government fell below a particular level, it could issue these accidental treasury bills and replenish its cash balances. This innocuous arrangement had the effect of automatically monetizing the fiscal deficit of the central government.
Under such an arrangement, the RBI virtually lost control over regulating the money supply. The fiscal dominance was complete. I had argued, even before 1991, to try and do away with this method.
As governor of RBI, I pressed with the finance minister to make this change and he readily agreed. This could indeed be considered because of the opening move towards giving autonomy to RBI concerning the conduct of monetary policy.
This was followed up later when the FRBM Act (2003) put an end to the RBI entering the first market in government securities. These are essential reforms to enable the RBI to manage liquidity within the system in line with its judgment.

Hence the correct answer is that the (D).

Note:There has, thus, been a paradigm shift in India’s approach to economic policy. even as reforms were introduced in the real sector, it became obvious that without corresponding reforms in the financial sector, the expected results would not be achieved.