C has a meaning issue.

C conveys that the water reserves are driving the cities and towns to implement mandatory rationing. "shrinking" merely modifies "water reserves".

It is the shrinking of or decline OF the water reserves that is driving the cities and towns to implement mandatory rationing.

While A may not flow as well as C, A conveys the intended meaning, which is that the declines are driving the cities and towns to implement mandatory rationing.
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MartyMurray I feel C is the correct answer not A. Please correct me.

After years of record drought, declines in California’s reserves of water are driving many of its cities and towns to implement mandatory rationing.

(A) declines in California’s reserves of water are driving many of its cities and towns.............declines in reserves is awkward construction for me.

(B) California’s reserves of water have declined so that many of its cities and towns have been driven......so that changes the meaning

(C) California’s shrinking water reserves are driving many of its cities and towns...........correct according to me. concise and simple.

(D) California’s shrinking water reserves are a drive for many of its cities and towns..........are a drive is awkward.

(E) California’s shrinking water reserves have declined to drive many of its cities and towns...........infinitive makes it sound intentional

Good point. Hmm. So maybe the wording would work as "water reserves in California". Then "California" could be the antecedent.
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I am not 100% sure.

It may be that using a possessive noun as the antecedent of a possessive pronoun is considered ok, but I don't like using possessive nouns as antecedents for any type of pronoun. So I am going to edit it, changing "California's" to "California".

At that point, I believe, A will be 100% correct.
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Okay, there has been a lot of modifications to the question and everything seems to be resolved.
But then Why A but not C (post edit)?
(A)declines in water reserves ......are driving away...
(C) shrinking water reserves....are driving away...
To me, there's not much difference in the meaning. Or, both convey fine things. What makes (A) better than (C)

sayantanc2k chetan2u daagh - what's your opinion?
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Cheers
PeeKay

In my opinion both A and C are alright.

The original poster of the question explains why C is wrong here:
https://gmatclub.com/forum/after-years- ... l#p1799675

But I am not quite in agreement with this explanation. A modified noun is not the same as the original noun. Consider the following sentence:
I am not afraid of a dog, but I am afraid of a barking dog.
Therefore, I feel "shrinking water reserves" in option C is not a problem.

How can the singular "its" be ever used for the plural "declines?"
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GMAT coaching under able guidance is only half expensive and time-consuming as a self-study in the final reckoning

There has been some great discussion going on regarding the antecedence of the pronoun in this topic. There is a view that grammatically, a noun that is inside of a preposition cannot act as the true reference of the pronoun. Here are some OG examples, which may be eye opening in the context.

1. Schistosomiasis, a disease caused by a parasitic worm, is prevalent in hot, humid climates, and it has become more widespread as irrigation projects have enlarged the habitat of THE FRESHWATER SNAILS THAT ARE THE PARASITE'S HOSTS FOR PART OF ITS LIFE CYCLE.

A. the freshwater snails that are the parasite's hosts for part of its life cycle
B. the freshwater snails that are the parasite's hosts in part of their life cycle
C. freshwater snails which becomes the parasite's hosts for part of its life cycles
D. freshwater snails which become the hosts of the parasite during the parasite's life cycles
E. parasite's hosts, freshwater snails which become their hosts during their life cycles
The correct answer is A, in which the pronoun 'its' refers to the parasitic worm, which is inside the prepositional phrase "by a parasitic worm"


2. In some types of pine tree, a thick layer of needles protects the buds from which new growth proceeds; consequently, they are able to withstand forest fires relatively well.

A) a thick layer of needles protects the buds from which new growth proceeds; consequently they are able to withstand forest fires relatively well
B) a thick needle layer protects buds from where new growth proceeds, so that they can withstand forest fires relatively well
C) a thick layer of needles protect the buds from which new growth proceeds; thus, they are able to withstand relatively well any forest fires
D) since the buds from which new growth proceeds are protected by a thick layer needle layer, consequently they can therefore withstand forest fires relatively well
E) because the buds where new growth happens are protected by a thick layer of needles, they are able to withstand forest fires relatively easily as a result

The correct choice is A, wherein the pronoun 'they' refers to "some types of pine tree" which per se is within the prepositional phrase "in some types of pine tree"

3. By a vote of 9 to 0, the Supreme Court awarded the Central Intelligence Agency broad discretionary powers enabling it to withhold from the public the identities of its sources of intelligence information.

(A) enabling it to withhold from the public
(B) for it to withhold from the public
(C) for withholding disclosure to the public of
(D) that enable them to withhold from public disclosure
(E) that they can withhold public disclosure of
The correct answer is A. The antecedence of 'it' is CIA, which is an object noun. It might be noted that CIA is not the doer or the agent of the action.
So what is the takeaway? IMO, we shouldn't be overly prudish about pronoun reference. Not that grammar is unimportant, but all the same, grammar has to be validated by logic in the final.
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GMAT coaching under able guidance is only half expensive and time-consuming as a self-study in the final reckoning

You have almost convinced me, but still I think that at the very least "declines in water reserves" more clearly expresses the point, which is that the declines in or the shrinking OF the reserves have driven the cities and towns to implement rationing.
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My thinking says that the word ''reserves'' is being used as ''adjective'' in the official correct sentence. So, for that reason, I drew some examples in which 'edited' and 'discussed' has been used as 'adjective'. If the word 'reserves' is being used as 'plural countable noun', then the use of 'reserves' is ok to me. But, how ''reserves'' is used as countable noun. Longman Dictionary says that the word ''decline'' is countable and plural when it is related with sales, profits, and production (become less). So, my question is how the word 'declines' is related with THESE things in this official sentence?
Thank you...

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“The heights by great men reached and kept were not attained in sudden flight but, they while their companions slept, they were toiling upwards in the night.”
― Henry Wadsworth Longfellow