The Economic Crisis of 1991


Highlights:-

  • Key events of the late 1990s

  • Impact of International Trade

  • External Influence on India's Trade Policies

  • Key Steps by the Govt of India

  • Outcomes and Learnings



The Indian economy, plagued by the continuous inward-looking and centralized economic policies, faced a major shock in 1991 when its foreign reserves were nearly depleted and India could hardly afford 3 weeks of imports including food products and crude oil. So, let’s find out what exactly the reasons behind the crisis were and how India came out of this economic disaster.


The crisis started to build in the mid-1980s when the Government of India cautiously began to reform the economy by reducing import quotas and tariffs on goods such as electronics, computers, and other durable goods. The objective of the reforms was to promote export-led growth by importing the components and then exporting the finished goods which are higher in terms of value. This resulted in an increase in economic growth in India to an average of 5.6% in 1981-90 which is much higher than the earlier average growth of 3.1%. The growth of imports was 53% in 6 years (1984-90) creating a huge trade imbalance. As a result, the real value of ‘Rupee’ declined by 30% and India’s external debt increased from $35 billion in 1984-85 to $69 billion in 1990-91 contributing to BoP (Balance of Payment) crisis.


The next factor contributing to India’s crisis was external and beyond India’s control, known as ‘The Gulf War’. High economic growth in the 1980’s lead to an increase in demand for crude oil and its imports increased by 40% during 1985-90. The value of petroleum imports increased from $2 billion to $5.6 billion after the Gulf War started in 1990, which involved many Middle Eastern countries like Saudi Arabia, Iraq, and Kuwait. Also, the Soviet Union collapsed in 1990 and the US economy also slowed down affecting India’s exports. As a result, the Balance of payment got worse.


Along with the Balance of Payment, India’s fiscal deficit also increased due to the heavy military spending, because of India’s intervention in the Sri Lankan Civil War. Hence by 1991, there was a double-crisis at the doors of India. The foreign reserves of India were nearly depleted. The Government of India responded by approaching IMF for a loan of more than $2 billion in exchange for 67 tons of India’s gold reserves as collateral and a promise to open up India’s economy. After that India initiated a series of systematic reforms which came to be known as Liberalization- Reducing the red-tape, Privatization- Easy private investment, and Globalization- Open door for Foreign Direct Investment. These reforms changed the structure of the Indian Economy from an Inward looking socialist economy to an act-outward mixed economy.


Since then, India has not looked back in terms of economic development and achieved an average growth of 7-8% which doubled India’s GDP every decade. India’s foreign reserves reached more than $400 billion in 2018 from $1.2 billion in 1991. India also bought 200 tons of gold from World Bank in 2009 which is 3 times gold which India kept as collateral. The crisis not only changed India’s economy forever but also enabled reforms that helped India in realizing its true potential as Global Economic Powerhouse of the 21st century.

Author: Sachin Yadav Co-Author: Lisa Goel

Data Source: www.statistica.com

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