1991 India Economic Crisis

1991 India economic crisis From Wikipedia, the free 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. loan.[1] Contents

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1 Causes and consequences 2 Recovery 3 Aftermath 4 See also 5 References

[edit edit]]Causes

and consequences

The crisis was caused by currency overvaluation overvaluation;; the current account deficit and investor confidence played significant role in the sharp exchange rate depreci ation. ation.[2] [3] [4] [5] 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. out.[6] 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  center and and states 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 theReserve 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. currencies . [2]

[edit]Recovery Further information: Economic liberalisation in India

With India’s foreign exchange reserves at $1.2 billion in January 1991 [7][8][9] and depleted by half by June,[9] barely enough to last for roughly 3 weeks of essential imports,[8][10]India was only weeks way from defaulting on its external balance of payment obligations.[8][9] The caretaker government in India headed by Prime Minister Chandra Sekhar 's, immediate response was to secure an emergency loan of $2.2 billion[11][12][13] from the International Monetary Fund by pledging 67 tons of  India's gold reserves as collateral.[1][12] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of  England[6][7] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.[6][7][14] 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.[6][10] Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed.[1] A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber .[6] The Chandra Shekhar government had collapsed a few months after having authorized the airlift.[6] The move helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.[7] 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'.[6] 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."

[15]

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.[16]edit