1991 Indian economic crisis

The 1991 Indian economic crisis had its roots in 1985 when India began having balance of payments problems as
imports swelled, leaving the country in a twin deficit: the Indian trade balance was in deficit at a time when the
government was running on a large fiscal deficit.[1] By the end of 1990 in the run-up to the Gulf War, the situation
became so serious that the Indian foreign exchange reserves could barely finance three weeks’ worth of imports while
the government came close to defaulting on its financial obligations. By July that year, the low reserves had led to a
sharp depreciation of the rupee, which in turn exacerbated the twin deficit problem.[2] Chandrasekhar government
could not pass the budget in February 1991 [3] at a crucial time when Moody had downgraded India and it further went
down after the budget was not passed and global credit-rating agencies further downgraded India from investment
grade making it impossible to even get short term loans and the government was in no position to give any
commitment to reform the economy. The World Bank and IMF also stopped their assistance, leaving the government
with no option except mortgaging the country's gold to avoid defaulting on payments.[4][5][6]

This led the Indian government to airlift national gold reserves as a pledge to a large conditional bail out from the
International Monetary Fund (IMF) and World Bank in exchange for a loan to cover balance of payment debts.[7]

The crisis led to the liberalisation of the Indian economy, as one of the conditions stipulated in the World Bank loan
(structural reform), requiring India to open itself up to participation from foreign entities in its industries, including
state owned enterprises.[8]

Contents
Causes and consequences
Recovery
Under Narsimha Rao Government
Aftermath
See also
References

Causes and consequences

The crisis was caused by currency overevaluation;[2] the current account deficit, and investor confidence played
significant role in the sharp exchange rate depreciation.[9][10][11]

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-
eighties, India started having the balance of payments problems. Precipitated by the Gulf War, India’s oil import bill
swelled, exports slumped, credit dried up, and investors took their money out.[12] Large fiscal deficits, over time, had a
spillover effect on the trade deficit culminating in an external payments crisis. By the end of the 1980s, India was in
serious economic trouble.

The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of Gross Domestic Product (GDP)
in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre alone, the gross fiscal deficit rose
from 6.1 percent of GDP in 1980-81 to 8.3 percent in 1985-86 and to 8.4 percent in 1990-91. Since these deficits had to
be met by borrowings, the internal debt of the government accumulated rapidly, rising from 35 percent of GDP at the
end of 1980-81 to 53 percent of GDP at the end of 1990-91. The foreign exchange reserves had dried up to the point
that India could barely finance three weeks worth of imports.[13]

In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of
the Indian rupee leading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending
the currency by expanding international reserves and slowing the decline in value. However, in mid-1991, with foreign
reserves nearly depleted, the Indian government permitted a sharp devaluation that took place in two steps within
three days (1 July and 3 July 1991) against major currencies.

Recovery
With India’s foreign exchange reserves at $1.2 billion in January 1991[14][15][16] and depleted by half by June,[16] barely
enough to last for roughly 3 weeks of essential imports,[15][17] India was only weeks away from defaulting on its
external balance of payment obligations.[15][16]

Government of India's immediate response was to secure an emergency loan of $2.2 billion[18][19][20] from the
International Monetary Fund by pledging 67 tons of India's gold reserves as collateral security.[7][19] The Reserve Bank
of India had to airlift 47 tons of gold to the Bank of England[12][14] and 20 tons of gold to the Union Bank of
Switzerland to raise $600 million.[12][14][21] . The van transporting the gold to the airport broke down en route due to
tyre burst and panic followed .[22][23][7]The airlift was done with secrecy as it was done in the midst of the 1991 Indian
General elections.[24] National sentiments were outraged and there was public outcry when it was learned that the
government had pledged the country's entire gold reserves against the loan.[12][17] A chartered plane ferried the
precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber.[12] The
Chandra Shekhar government had collapsed a few months after having authorised the airlift.[12] The move helped tide
over the balance of payment crisis and kick-started P.V. Narasimha Rao’s economic reform process.[14]

Under Narsimha Rao Government

P. V. Narasimha Rao took over as Prime Minister in June, and roped in Manmohan Singh as Finance Minister.[12] The
Narasimha Rao government ushered in several reforms that are collectively termed as liberalisation in the Indian
media.

The reforms formally began on 1 July 1991 when RBI devaluated Indian Rupee by 9% and by a further 11% on 3 July. It
was done in two doses to test the reaction of the market first by making a smaller depreciation of 9%.[25] There was
significant opposition to such reforms, suggesting they were an "interference with India's autonomy". Then Prime
Minister Rao's speech a week after he took office highlighted the necessity for reforms, as New York Times reported,
"Mr. Rao, who was sworn in as Prime Minister last week, has already sent a signal to the nation—as well as the I.M.F.
—that India faced no "soft options" and must open the door to foreign investment, reduce red tape that often cripples
initiative, and streamline industrial policy. Mr. Rao made his comments in a speech to the nation Saturday night." [26]
The foreign reserves started picking up with the onset of the liberalisation policies and reached an all-time high
US$426.1 billion as on 13 April 2018 [27]

Aftermath
The program of economic policy reform which was put in place in 1991 has yielded amazing results, dramatically
improving the quality of life in India. Trade liberalisation in India has also corresponded with a dramatic rise in
inequality and associated social issues, but these are normal for a developing economy. [28]

The Indian GDP rose from $266 billion in 1991 (inflation adjusted) to $3 trillion in 2019 (1100% increase) while its
purchasing power parity rose from $1 trillion in 1991 to $12 trillion in 2019 (1100% increase).
See also
Economic liberalisation in India
Corruption in India
Economic history of India
Economy of India
License Raj

References
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Retrieved 30 October 2018.
2. "What Caused the 1991 Currency Crisis in India?" (https://www.imf.org/external/pubs/ft/staffp/2002/03/pdf/cerra.p
df) (PDF). International Monetary Fund. VALERIE CERRA and SWETA CHAMAN SAXENA.
3. "1991, the untold story" (https://www.thehindu.com/opinion/op-ed/1991-the-untold-story/article14513325.ece).
Yashwant Sinha. The Hindu. 29 July 2016. Retrieved 21 December 2018.
4. "How the economy found its feet" (https://www.thehindu.com/opinion/op-ed/How-the-economy-found-its-feet/articl
e14506275.ece). Deepak Nayar. The Hindu. 18 October 2016. Retrieved 21 December 2018.
5. "In fact: How govts pledged gold to pull economy back from the brink" (https://indianexpress.com/article/explaine
d/in-fact-how-govts-pledged-gold-to-pull-economy-back-from-the-brink/). Shaji Vikraman. The Indian Express. 5
April 2017. Retrieved 21 December 2018.
6. Stuart Corbridge; John Harriss (28 May 2013). Reinventing India: Liberalization, Hindu Nationalism and Popular
Democracy (https://books.google.com/books?id=ERgoAAAAQBAJ&pg=PT144). Wiley. pp. 144–. ISBN 978-0-
7456-6604-4. Retrieved 20 December 2018.
7. "I think a stimulus package is necessary, yes. Bailouts, no" (http://business.rediff.com/slide-show/2009/may/25/sli
de-show-5-lord-desai-on-recession-and-indian-politics.htm). Rediff News. Retrieved 20 October 2009.
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g/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/0586CC45A28A2749852567F5005D8C89).
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with-high-inequality/

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