1991 INDIAN ECONOMIC CRISIS

AND REFORMS
Asian Economies GMA 2014
Group 4 : Camilia Berrada, Alice Gay, Hicham El Azani, Aurle
Gouy
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1. Pre-crisis context
2. Crisis outlines
3. IMF plan and conditions
4. Reforms and consequences
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1. Pre-crisis context
2. Crisis outlines
3. IMF plan and conditions
4. Reforms and consequences
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1. PRE-CRISIS CONTEXT
NERHUS DEVELOPMENT POLICY (50S)
Nehrus vision for Independent India was to be self-sufficient, to
avoid depending on occidental capitals.

Nehru was influenced by socialism and especially in Soviet Union.
He instaured Five Years plans and allowed all industries in India to
be potentially nationalized.

India would thus follow a development strategy by substitution of
importations , based on 4 pillars:
Central planification focused on industry
Large public sector
Robust custom barriers
Licence raj authorization system

The Licence raj administration authorizations aimed at controling the
private sector production capacity (in volume and in terms of
diversification).
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1. PRE-CRISIS CONTEXT
NERHUS DEVELOPMENT POLICY (50S)
This inward-looking and highly interventionist development strategy
would protect Indian economy from international competition, which
had several consequences :

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Indian exports
share in the
global
economy goes
from 1,9% in
1950 to 0,6%
in 1973
1. PRE-CRISIS CONTEXT
MODERNISATION FINANCED BY LOANS (80S)
However, Indian economy is not sustainable without some vital
importations such as energy. In order to pay for those importations,
India needs to sell to foreign countries.
Thus, the 80s is a decade of slow economic opening to the global
economy, under the governance of Rajiv Gandhi.
The persistent defiance of Indian government towards multinationals,
which are seen as a symbol of occidental imperialism, leads to a
financing of modernization with loans.
The growing dependence on energy importations worsened the
situation (petroleum imports increased by 40% from 1986/87 to
1989/90).
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Indias external debts almost doubled from $31 million in
1984/85 to $69 million by the end of 1990/91
1. PRE-CRISIS CONTEXT
HIGH SENSIVITY TO EXTERNAL SHOCKS (1989-90)
The current account deficit was deepening, and was increasingly
financed by borrowing on commercial terms and remittances of
nonresident workers.
This lead to a high vulnerability to external shock in 1990/91, which
would further cause the largest crisis Independent India ever
encountered.

Two external shocks would deepen the current account deficit :
Events in the Middle-East in 1990 leading to the surge of world oil prices
Slow growth in important trading partners : when US was the largest export
destination for India, its growth slowed down from 3,9% in 1988 to 0,8% in
1990 and to -1% in 1991.

Rising political uncertainty in India also weakened the economy.
Castes and religion disputes broke out and riots spread throughout
the country.
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1. Pre-crisis context
2. Crisis outlines
3. IMF plan and conditions
4. Reforms and consequences
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2. CRISIS OUTLINES
CRISIS BREAKDOWN
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A classic external payments crisis...

i. High fiscal and current account deficits

ii. External borrowing to finance the deficits

iii. Rising debt service obligations

iv. Rising inflation, and inadequate exchange
rate adjustment
Due to a Foreign Exchange crisis

In 1991, foreign trade shrunk imports falling by
19.4% and exports by 1.5%. Rupee depreciated
by 26.7% against US dollars.

External debt reached $83 billion in March 1991,
45% of which was contracted from private
creditors and at variable interest rates
Political Instability 1/2

$2 billion was borrowed each day by the last
government to avert a default

National Front coalition faced a nationwide
crisis. Government collapsed when the BJP
pulled out.

New minority government failed to pass the
scheduled budget in February 1991

Political Instability 2/2

In May 1991, while campaigning for the general
elections, former prime minister Rajiv Gandhi
was assassinated

In June 1991, Congresss political mandarins
chose Narasimha Rao to become Indias new
prime minister

Rao chose Manmohan Singh as his partner



2. CRISIS OUTLINES
MODELISATIONS
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And a fiscal crisis

There was a serious fiscal crisis in which fiscal
deficit reached the level of 6.6% of GDP

Internal debts rose to about 50% of GDP with
interest payments draining about 39% of total
revenue collections of central government

GNP growth rate fell to 1.4% from the peak level
of 10.5% in 1988-99
Negative growth rate

i. Agricultural promotion: -2.8%
ii. Food Grain production: -5.3%
iii. Industrial production: -0.1%

Inflation Rate based both on WPI and CPI
soared high at 13-14%
Emergency situation

In June 1991, the Indian Treasury only has 4
weeks of importations in value in reserve

Indian state almost goes bankrupt

This has been perceived has a national
humiliation by the Indian government

India considered a few options

i. Temptation to default
ii. Seeking private funds
iii. To pawn gold




IMF
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1. Pre-crisis context
2. Crisis outlines
3. IMF plan and conditions
4. Reforms and consequences
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3. IMF PLAN AND CONDITIONS
SITUATION
1991: India was only weeks way from defaulting on its
external balance of payment obligations
Indias foreign exchange reserves = $1.2 billion in
January 1991
It depleted by half by June
India's foreign debt = $72 billion (world's third
largest debtor after Brazil and Mexico)
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3. IMF PLAN AND CONDITIONS
RESPONSE
The newly elected Indian Government sought for
urgent aid: the biggest loan the I.M.F. has ever made
to India of $2.2 billion by pledging 67 tons of India's
gold reserves as collateral

Set of conditions required by IMF
Demanding that India reduce its budget deficit
Open its market to foreign competition
Diminish its maze of licensing requirements
Cut subsidies, and liberalize investment

Anger of people reforms are considered as an
"interference with India's autonomy" and would lead to
reductions of food and fertilizer subsidies

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3. IMF PLAN AND CONDITIONS
REACTION & CONSEQUENCES
Anger of people reforms are considered as an
"interference with India's autonomy" and would lead to
reductions of food and fertilizer subsidies

Unavoidable reforms: India had to open the door to foreign
investment, reduce red tape and rationalize its industrial
Policy

Recovery: The forex reserves started picking up thanks to
liberalisation policies (it reched $314.61 billion at the end of
May 2008)

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1. Pre-crisis context
2. Crisis outlines
3. IMF plan and conditions
4. Reforms and consequences
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4. REFORMS AND CONSEQUENCES
REFORMS FOR A CHANGE OF MODEL
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Industrial Liberalization

Abolition of industrial licensing (1991 industrial
policy)

Restrictions removed on private expansions
(scraping MRTP)
Opening the economy to FDI and foreign tech
(creation of the Foreign investment Promotion
board, automatic approval for up to 51 % foreign
equity in high investment priority sectors (capital
goods, services, food processing)

Trade Liberalization

Elimination of import licensing

Rationalization of tariff structures (reduction of
maximum duty on all goods from 110 % to 25 %
in ten years)

Decanalisation of imports and exports : 16
export items and 20 import items

Adoption of flexible exchange rate
Financial Sector Liberalization

Banking sector : public banks can have up to
49 % of private capital, removal of mandatory
convertibility clause

Capital Market

Insurance

FiscalSector Liberalization


4. REFORMS AND CONSEQUENCES
CONSEQUENCES
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Industrial Liberalization



Trade Liberalization

Financial Sector Liberalization



FiscalSector Liberalization


4. REFORMS AND CONSEQUENCES
CONSEQUENCES: 2013 DEPRECIATION
xxx
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DO YOU
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BIBLIOGRAPHY
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20
IMF Working paper : What
caused the 1991 currency crisis
in India , by Valerie Cerra and
Sweta Chaman Saxena, Oct. 2000
Inde: la roupie chute, la
croissance ralentit , in
Lexpansion.com, Aug 2013
LInde rtive au libralisme
total , by Christophe Jaffrelot, Jan
2004 in Le Monde Diplomatique

English articles and reports French articles and reports