1991 India economic crisis - What happened exactly?

[Srijan Narang]

I recently came across this discussion on Quora on the 1991 Indian economic crisis and was left wondering how could have an economy like India's ever end up in so much debt that it had to airlift its gold reserves as a pledge with the IMF for a loan!

What happened in 1991?

"By 1985, India had started having balance of payments problems. By the end of 1990, India was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had been reduced to such a point that India could barely finance three weeks’ worth of imports which resulted India to airlift its gold reserves as a pledge with the International Monetary Fund (IMF) for a loan." - Wikipedia (For reading further click here).

How did it happen?

The crisis was caused by currency overvaluation; the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.

1. Growing fiscal imbalances over the 1980s - During the mid-eighties, India started having balance of payments problems. Since 1960s, India had only depended on the Soviet Union for its exports simply because it had failed to develop good economic relationships with the US and Western Europe. All was going pretty well till the Soviet Union started to crack and by 1991 they were split into 15 nations (Russia, Kazakhstan, Ukraine, etc). Now, India had a major problem because our primary buyer was in turmoil and exports were down significantly.

2. Currency overvaluation - US went to war with Iraq in early 1991. Oil fields started to burn and ships found it hard to reach Persian gulf. Iraq and Kuwait were our big suppliers of oil. The war led to destruction of India's oil imports and the prices shot up substantially - doubling in a few months.

3. Political Instability - Prime Minister Rajiv Gandhi was involved in a series of troubles - Bofors scandal, IPKF misadventure,Shah Bano case that eventually led to his ousting in 1989. What followed were two more terrible leaders who were as unstable as they were incompetent. This had a huge effect on Indian economy that was totally forgotten in the political crisis. In 1991 this stop-gap government crashed. Until Narasimha Rao was sworn as Prime Minister in 1991, Indian economy was left in gross neglect.

The triple crisis brought India on its knees. We could neither export nor import and also our production was effectively stopped by political crisis. The whole economy was brought to a stand still and nothing could be done about it. We were running out of dollars to buy essential items like crude oil and food from the rest of the world and exports were significantly less than imports. So an economic crisis was simply inevitable.

Aftermath

Since then several policy reforms have been put up in place to counter such a situation. These reforms are termed as "liberalisation".

What are your views on this?

[Akshita Yadav]

Hey

Im attaching an article regarding the same, by C P Chandrashekhar and Prabhat Patnaik, titled "Indian Economy under 'Structural Adjustment'" . I understand this is the opposite of what mainstream economists would have us believe, but in my opinion, its worth a read and gives perspective. 

Its a well structured article, and i hope it helps :)

Yours Sincerely

Akshita Yadav

CESP, JNU

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