In 1991 India faced a major economic crisis caused by various Macroeconomic factors and Political Factors.

India was growing at 5.5% in 1980s. India was following protectionist policy with focus on domestic industrialization and import substitutes. The exports constituted of Primary products and were of low quality. Aid flows, commercial deposits and non resident Indian deposits were the only form on capital inflow. FDI and FII were restricted. Various development projects caused huge foreign borrowing and constant devaluation of currency to promote export raised the amount of external debt. Macroeconomic Factors effecting leading to Balance of Payment crisis
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Current account declined sharply during this period as shown in the following graph. This was due to increase in import by nearly 40% during the late 1980s. And at the same time exports growth went down and thus widening the trade deficit.

Capital inflow during this period was very low owing to the heavy restrictions on FDI in almost all sectors. This period also witnessed currency undergoing devaluation (as shown in the following figure) and interest rates hike. This impacted the foreign reserve and foreign debt increase. External Debt in India rose from $35 bn (in 1984-85) to $69 bn(in 1990-91).

Political Factors
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Breakup of the Soviet Union leads to huge decline in export volume. This effected the trade balance of India Gulf war hit the contacts that India had with Iraq and Kuwait. Thus India had to buy oil from spot market at high prices The political uncertainty in India also reduced on the focus of Indian government on looming economic crisis.