FERA and Indian Economic Reforms Explained

The question asks to identify the policy that replaced the Foreign Exchange Regulation Act (FERA) in India, specifically during the period of significant economic reforms. Understanding this transition is key to grasping the changes in India's approach to foreign exchange management.

Understanding FERA and the Need for Change

The Foreign Exchange Regulation Act (FERA) was enacted in 1973. Its primary objective was to regulate certain payments and dealings in foreign exchange and securities, and the import and export of currency and monetary instruments into or out of India. While FERA served its purpose for a long time, the economic liberalization initiated in India in 1991 brought about a need for a more flexible and market-oriented regulatory framework.

The initial economic reforms aimed at:

• Integrating the Indian economy with the global economy.
• Attracting foreign investment.
• Simplifying procedures for international trade and finance.

FERA, with its stringent regulatory nature, was seen as an impediment to these reform goals. Therefore, a new legislation was introduced to manage foreign exchange in a liberalized environment.

Introducing FEMA: The Replacement Policy

The correct answer is the Foreign Exchange Management Act (FEMA), denoted by the acronym FEMA. This act was introduced in 1999 and came into effect from June 1, 2000. FEMA replaced FERA and aimed to:

• Consolidate and amend the law relating to foreign exchange.
• Facilitate external trade and payments.
• Promote the orderly development and maintenance of the foreign exchange market in India.
• Permit convertibility of the Indian Rupee.

Essentially, FEMA shifted the focus from 'regulation' (as in FERA) to 'management' of foreign exchange, aligning with the broader goals of the economic reforms in the Indian Economy.

Analyzing the Options

Let's look at why FEMA is the correct choice and the other options are not:

• FIMC – Foreign Investment Management Code: This is not the correct act that replaced FERA. While related to foreign investment, it doesn't represent the primary legislation for overall foreign exchange management post-FERA.
• FEMA – Foreign Exchange Management Act: This is the correct legislation that replaced FERA during the economic reforms. It governs the management of foreign exchange in India.
• FRMA – Foreign Reserve Monitoring Act: This is not the correct act. There isn't a primary act by this name that replaced FERA. Monitoring foreign reserves is part of broader central banking functions, not a replacement act for FERA.
• FIAC – Foreign Investment and Audit Code: This is also not the correct act. While foreign investment and audits are crucial aspects of economic activity, FIAC does not represent the legislation that replaced FERA.

Therefore, the shift from the restrictive FERA to the more facilitative FEMA was a significant step in India's journey of economic liberalization.