1991 India economic crisis
Encyclopedia
By 1985, India
had started having balance of payments
problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank
had refused new credit and foreign exchange reserves
had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund
(IMF) for a loan.
The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having 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. Large fiscal deficits, over time, had a spill over effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble.
The gross fiscal deficit of the government (center and states
) rose from 9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the center 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.
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 expending international reserves and slowing the decline in value.However, in mid-1991 ,with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within three days (July 1 and July 3, 1991) against major currencies.
The caretaker government in India
headed by Prime Minister
Chandra Sekhar Singh's, immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund
by pledging 67 tons of India's gold reserves as collateral. The Reserve Bank of India
had to airlift 47 tons of gold to the Bank of England
and 20 tons of gold to the Union Bank of Switzerland
to raise $600 million. National sentiments were outraged and there was public outcry when its was learned that the government had pledged the country's entire gold reserves against the loan. Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed. A chartered plane ferried the precious cargo to London
between 21 May and 31 May 1991, jolting the country out of an economic slumber. Chandra Shekhar government had collapsed a few months after having authorized the airlift. The move helped tide over the balance of payment crisis and kick-started Manmohan Singh
’s economic reform process.
P.V. Narasimha Rao
took over as Prime Minister
in June, the crisis forcing him to rope in Manmohan Singh
as Finance Minister
, who unshackled what was then called the 'caged tiger'. The Narasimha Rao
government ushered in several reforms that are collectively termed as liberalisation in the Indian media
. Although, most of these reforms came because IMF required those reforms as a condition for loaning money to India in order to overcome the crisis. There were significant opposition to such reforms, suggesting they are 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." The forex reserves started picking up with the onset of the liberalisation policies and peaked to $314.61 billion at the end of May 2008.
India
India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...
had started having balance of payments
Balance of payments
Balance of payments accounts are an accounting record of all monetary transactions between a country and the rest of the world.These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers...
problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
had refused new credit and foreign exchange reserves
Foreign exchange reserves
Foreign-exchange reserves in a strict sense are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, Special Drawing Rights and International Monetary Fund reserve positions...
had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF) for a loan.
Causes and consequences
The crisis was caused by currency overvaluation; the current account deficit and investor confidence played significant role in the sharp exchange rate depreciation.The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During mid eighties, India started having balance of payments problems. Precipitated by the Gulf War
Gulf War
The Persian Gulf War , commonly referred to as simply the Gulf War, was a war waged by a U.N.-authorized coalition force from 34 nations led by the United States, against Iraq in response to Iraq's invasion and annexation of Kuwait.The war is also known under other names, such as the First Gulf...
, India’s oil import bill swelled, exports slumped, credit dried up and investors took their money out. Large fiscal deficits, over time, had a spill over effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble.
The gross fiscal deficit of the government (center and states
State governments in India
State governments in India are the governments ruling States of India and the main minsters in the state are the chief ministers. Power is divided between central government and state governments. While central government handles Military, external affairs etc., the state government controls...
) rose from 9.0 percent of GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the center 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.
In mid-1991, India's exchange rate
Exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupee
Indian rupee
The Indian rupee is the official currency of the Republic of India. The issuance of the currency is controlled by the Reserve Bank of India....
leading up to mid-1991. The authorities at the Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
took partial action, defending the currency by expending international reserves and slowing the decline in value.However, in mid-1991 ,with foreign reserves nearly depleted, the Indian government permitted a sharp depreciation that took place in two steps within three days (July 1 and July 3, 1991) against major currencies.
Recovery
With India’s foreign exchange reserves at $1.2 billion in January 1991 and depleted by half by June, barely enough to last for roughly 3 weeks of essential imports, India was only weeks way from defaulting on its external balance of payment obligations.The caretaker government in India
Government of India
The Government of India, officially known as the Union Government, and also known as the Central Government, was established by the Constitution of India, and is the governing authority of the union of 28 states and seven union territories, collectively called the Republic of India...
headed by Prime Minister
Prime Minister of India
The Prime Minister of India , as addressed to in the Constitution of India — Prime Minister for the Union, is the chief of government, head of the Council of Ministers and the leader of the majority party in parliament...
Chandra Sekhar Singh's, immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
by pledging 67 tons of India's gold reserves as collateral. The Reserve Bank of India
Reserve Bank of India
The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of...
had to airlift 47 tons of gold to the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
and 20 tons of gold to the Union Bank of Switzerland
Union Bank of Switzerland
Union Bank of Switzerland was a large integrated financial services company located in Switzerland. The bank, which at the time was the second largest bank in Switzerland, merged with Swiss Bank Corporation in 1998, to become UBS to form what was then the largest bank in Europe and the second...
to raise $600 million. National sentiments were outraged and there was public outcry when its was learned that the government had pledged the country's entire gold reserves against the loan. Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed. A chartered plane ferried the precious cargo to London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
between 21 May and 31 May 1991, jolting the country out of an economic slumber. Chandra Shekhar government had collapsed a few months after having authorized the airlift. The move helped tide over the balance of payment crisis and kick-started Manmohan Singh
Manmohan Singh
Manmohan Singh is the 13th and current Prime Minister of India. He is the only Prime Minister since Jawaharlal Nehru to return to power after completing a full five-year term. A Sikh, he is the first non-Hindu to occupy the office. Singh is also the 7th Prime Minister belonging to the Indian...
’s economic reform process.
P.V. Narasimha Rao
P. V. Narasimha Rao
Pamulaparti Venkata "Narasimha Rao" was the ninth Prime Minister of India . He led an important administration, overseeing a major economic transformation and several home incidents affecting national security of India. Rao accelerated the dismantling of the Licence Raj. He is often referred to as...
took over as Prime Minister
Prime Minister of India
The Prime Minister of India , as addressed to in the Constitution of India — Prime Minister for the Union, is the chief of government, head of the Council of Ministers and the leader of the majority party in parliament...
in June, the crisis forcing him to rope in Manmohan Singh
Manmohan Singh
Manmohan Singh is the 13th and current Prime Minister of India. He is the only Prime Minister since Jawaharlal Nehru to return to power after completing a full five-year term. A Sikh, he is the first non-Hindu to occupy the office. Singh is also the 7th Prime Minister belonging to the Indian...
as Finance Minister
Finance Minister of India
The Minister of Finance, also known as the Finance Minister of India is a cabinet position in the Government of India and heads the Ministry of Finance. He drafts the general budget of the country, and is in charge of the national economy. Currently, Pranab Mukherjee holds the charge of finance...
, who unshackled what was then called the 'caged tiger'. The Narasimha Rao
Narasimha Rao
Narasimha Rao or Narasimharao is one of the Indian names.* Pamulaparthi Venkata Narasimha Rao served as the 10th Prime Minister of India.* Modireddy Venkat Narasimha Rao, is a former Indian cricketer....
government ushered in several reforms that are collectively termed as liberalisation in the Indian media
Mass media
Mass media refers collectively to all media technologies which are intended to reach a large audience via mass communication. Broadcast media transmit their information electronically and comprise of television, film and radio, movies, CDs, DVDs and some other gadgets like cameras or video consoles...
. Although, most of these reforms came because IMF required those reforms as a condition for loaning money to India in order to overcome the crisis. There were significant opposition to such reforms, suggesting they are 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." The forex reserves started picking up with the onset of the liberalisation policies and peaked to $314.61 billion at the end of May 2008.
Aftermath
A program of economic policy reform has since been put in place which has yielded very satisfactory results so far. While a lot still remains on the unfinished reform agenda, the prospects of macro stability and growth are indeed encouraging.See also
- Economic liberalization in IndiaEconomic liberalization in IndiaThe economic liberalization in India refers to ongoing economic reforms in India that started on 24 July 1991. After Independence in 1947, India adhered to socialist policies. In the 1980s, Prime Minister P. V. Narasimha Rao initiated some reforms...
- Corruption in IndiaCorruption in IndiaPolitical, bureaucratic, corporate and individual corruption in India are major concerns. A 2005 study conducted by Transparency International in India found that more than 55% of Indians had first-hand experience of paying bribes or influence peddling to get jobs done in public offices...
- Economic history of IndiaEconomic history of IndiaThe known Economic history of India begins with the Indus Valley civilization. The Indus civilization's economy appears to have depended significantly on trade, which was facilitated by advances in transport. Around 600 BC, the Mahajanapadas minted punch-marked silver coins. The period was marked...
- Economy of IndiaEconomy of IndiaThe Economy of India is the ninth largest in the world by nominal GDP and the fourth largest by purchasing power parity . The country is a part of the G-20 major economies and the BRICS, in addition to being partners of the ASEAN. India has a per capita GDP of $3,608 as per 2010 figures, making it...
- License Raj