1991 Indian economic crisis - Revision history

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{{Short description|Indian economic crisis of 1991}}
{{Use dmy dates|date=May 2020}}
{{Use Indian English|date=July 2015}}
The '''1991 Indian economic crisis''' was an economic crisis in India resulting from a balance of payments deficit due to excess reliance on imports and other external factors. {{citation needed|date=June 2021}}. India's economic problems started worsening in 1985 as imports swelled, leaving the country in a [[twin deficit]]: the Indian trade balance was in deficit at a time when the government was running on a huge fiscal deficit.<ref name="originalreport">{{cite web |title=India - Structural Adjustment Credit Project (English) - Presidents report |url=http://documents.worldbank.org/curated/en/999451468260069468/India-Structural-Adjustment-Credit-Project |website=documents.worldbank.org |publisher=World bank |access-date=30 October 2018}}</ref>

The collapse of the Soviet Bloc, with which India had rupee exchange in trade, also caused problems. By the end of 1990, in the run-up to the [[Gulf War]], the dire situation meant that the Indian [[foreign exchange reserves]] could have barely financed three weeks' worth of imports. Meanwhile, the government came close to defaulting on its own financial obligations. By July that year, the low reserves had led to a sharp depreciation/devaluation of the rupee, which in turn exacerbated the twin deficit problem.<ref name="auto">{{cite web|url=https://www.imf.org/external/pubs/ft/staffp/2002/03/pdf/cerra.pdf|title=What Caused the 1991 Currency Crisis in India?|website=International Monetary Fund|publisher=VALERIE CERRA and SWETA CHAMAN SAXENA}}</ref>

The [[Chandra Shekhar government|Chandrasekhar government]] could not pass the budget in February 1991<ref>{{cite web | url=https://www.thehindu.com/opinion/op-ed/1991-the-untold-story/article14513325.ece | title=1991, the untold story | work=The Hindu|author=Yashwant Sinha|author-link=Yashwant Sinha| date=29 July 2016 | access-date=21 December 2018}}</ref> after [[Moody's Investors Service|Moody]] downgraded India's bond ratings. The ratings further deteriorated due to the unsuccessful passage of the budget. This made it impossible for the country to seek short term loans and exacerbated the existing economic crisis.<ref>{{cite web | url=https://www.business-standard.com/article/beyond-business/two-months-that-changed-india-111070200041_1.html | title=Two months that changed India | publisher=[[Business Standard]] | date=20 January 2013 | accessdate=3 August 2021}}</ref> The [[World Bank]] and [[IMF]] also stopped their assistance, leaving the government with no option except to mortgage the country's gold to avoid defaulting on payments.<ref>{{cite web | url=https://www.thehindu.com/opinion/op-ed/How-the-economy-found-its-feet/article14506275.ece | title=How the economy found its feet | work=The Hindu|author=Deepak Nayar | date=18 October 2016 | access-date=21 December 2018}}</ref><ref>{{cite web | url=https://indianexpress.com/article/explained/in-fact-how-govts-pledged-gold-to-pull-economy-back-from-the-brink/ | title=In fact: How govts pledged gold to pull economy back from the brink | work=The Indian Express|author=Shaji Vikraman | date=5 April 2017 | access-date=21 December 2018}}</ref><ref name="CorbridgeHarriss2013">{{cite book|author1=Stuart Corbridge|author2=John Harriss|title=Reinventing India: Liberalization, Hindu Nationalism and Popular Democracy|url=https://books.google.com/books?id=ERgoAAAAQBAJ&pg=PT144|year=2013|publisher=Wiley|isbn=978-0-7456-6604-4|page=144}}</ref>

In an attempt to seek an economic bailout from the IMF, the Indian government airlifted its national [[gold reserves]].<ref name="bail">{{cite web|url=http://business.rediff.com/slide-show/2009/may/25/slide-show-5-lord-desai-on-recession-and-indian-politics.htm|title=I think a stimulus package is necessary, yes. Bailouts, no|work=Rediff News|access-date=2009-10-20}}</ref>

The crisis, in turn, paved the way for the [[Economic liberalisation in India|liberalisation of the Indian economy]], since one of the conditions stipulated in the World Bank loan (structural reform), required India to open itself up to participation from foreign entities in its industries, including its state-owned enterprises.<ref name="worldbank">{{cite web |title=Structural adjustments in India - a reportof the Independent Evaluation Group (IEG) |url=http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/0586CC45A28A2749852567F5005D8C89 |website=lnweb90.worldbank.org |publisher=World bank |access-date=30 October 2018 |archive-url=https://web.archive.org/web/20190509212112/http://lnweb90.worldbank.org/oed/oeddoclib.nsf/DocUNIDViewForJavaSearch/0586CC45A28A2749852567F5005D8C89 |archive-date=9 May 2019 |url-status=dead }}</ref>

The liberalisation of Indian economy resulted in a large increase in inequality with income share of Top 10% of the population increasing from 35% in 1991 to 57.1% in 2014. Likewise, the income share of Bottom 50% decreased from 20.1% in 1991 to 13.1% in 2014.<ref>{{Cite web|title=World Inequality Database - India|url=https://wid.world/country/india/|url-status=live|website=World Inequality Database}}</ref>

== Causes and consequences ==
The crisis was caused by currency [[overvaluation]];<ref name="auto"/> the [[current account deficit]], and investor confidence played significant role in the sharp exchange rate depreciation.<ref>[http://www.globaleconomicgovernance.org/wp-content/uploads/ghosh-pathways_india.pdf Pathways Through Financial Crisis: India] {{Webarchive|url=https://web.archive.org/web/20131025042847/http://www.globaleconomicgovernance.org/wp-content/uploads/ghosh-pathways_india.pdf |date=25 October 2013 }}, Arunabha Ghosh, Global Governance 12 (2006), 413–429.</ref><ref name="Ghosh">[http://www.globaleconomicgovernance.org/wp-content/uploads/Ghosh%20-%20India.pdf India's Pathway through Financial Crisis] {{webarchive|url=https://web.archive.org/web/20111112080531/http://www.globaleconomicgovernance.org/wp-content/uploads/Ghosh%20-%20India.pdf |date=12 November 2011 }}. [[Arunabha Ghosh]]. Global Economic Governance Programme. Retrieved on 2 March 2007.</ref><ref>{{cite web|url=http://findebookee.com/c/crisi-in-india|title=findebookee.com|website=findebookee.com|access-date=21 January 2019}}</ref>

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-eighties, India started having the 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.<ref name="jolt">{{cite web|url=http://www.telegraphindia.com/1091104/jsp/frontpage/story_11697358.jsp |title=India shining, India scraping |work=The Telegraph |access-date=2009-10-20 |archive-url=https://web.archive.org/web/20091106123415/http://www.telegraphindia.com/1091104/jsp/frontpage/story_11697358.jsp |archive-date=6 November 2009 |url-status=live}}</ref> Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external payments crisis. By the end of the 1980s, India was in serious economic trouble.

The gross fiscal deficit of the government ([[Indian Central Government|centre]] and [[State governments in India|states]]) rose from 9.0 percent of [[Gross domestic product|Gross Domestic Product]] (GDP) in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre 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.<ref name="WB2">{{cite web |title=Project proposal - Structured adjustment of India |url=http://documents.worldbank.org/curated/en/999451468260069468/India-Structural-Adjustment-Credit-Project |website=documents.worldbank.org |publisher=World Bank |access-date=30 October 2018}}</ref>

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 expanding international reserves and slowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted, the Indian government permitted a sharp devaluation that took place in two steps within three days (1 July and 3 July 1991) against major currencies.

== Recovery ==
{{Further|Economic liberalisation in India}}
With India’s [[foreign exchange reserves]] at $1.2 billion in January 1991<ref name="circle">{{cite news | url=http://timesofindia.indiatimes.com/biz/india-business/Full-circle-India-buys-200-tons-gold-from-IMF/articleshow/5194338.cms | title=Full circle: India buys 200 tons gold from IMF | work=Rediff News | date=4 November 2009 | access-date=2009-10-20 | first1=Chidanand | first2=Prabhakar | last1=Rajghatta | last2=Sinha}}</ref><ref name="why">{{cite web|url=http://business.rediff.com/slide-show/2009/nov/03/slide-show-1-why-india-bought-imf-gold.htm |title=Why India bought IMF gold |work=Rediff News |access-date=2009-10-20 |archive-url=https://web.archive.org/web/20091106095241/http://business.rediff.com/slide-show/2009/nov/03/slide-show-1-why-india-bought-imf-gold.htm |archive-date=6 November 2009 |url-status=live}}</ref><ref name="live">{{cite web|url=http://www.livemint.com/2009/11/02231541/RBI-to-buy-200-tonnes-of-IMF-g.html |title=RBI to buy 200 tonnes of IMF gold |work=LiveMint |access-date=2009-10-20 |archive-url=https://web.archive.org/web/20091103144537/http://www.livemint.com/2009/11/02231541/RBI-to-buy-200-tonnes-of-IMF-g.html |archive-date=3 November 2009 |url-status=live}}</ref> and depleted by half by June,<ref name="live" /> barely enough to last for roughly 3 weeks of essential imports,<ref name="why" /><ref name="pti">{{cite web|url=http://www.ptinews.com/news/360808_RBI-s-gold-buying-has-its-own-sentimental-value--FM |title=RBI's gold buying has its own sentimental value: FM |work=PTI |access-date=2009-10-20 |archive-url=https://web.archive.org/web/20091106120333/http://www.ptinews.com/news/360808_RBI-s-gold-buying-has-its-own-sentimental-value--FM |archive-date=6 November 2009 |url-status=live}}</ref> India was only weeks away from defaulting on its external balance of payment obligations.<ref name="why" /><ref name="live" />

[[Government of India]]'s immediate response was to secure an emergency loan of $2.2 billion<ref>{{cite book|last=Meredith|first=Robyn|title=The Elephant and the Dragon|year=2007|publisher=W. W. Norton & Company|isbn=978-0-393-06236-6|url-access=registration|url=https://archive.org/details/elephantdragonri00mere_0}}</ref><ref name="buy">{{cite web|url=http://www.thehindubusinessline.com/2009/11/04/stories/2009110452340100.htm |title=RBI buys 200 tonnes of gold from MF |work=The Hindu |access-date=2009-10-20 |archive-url=https://web.archive.org/web/20091106104709/http://www.thehindubusinessline.com/2009/11/04/stories/2009110452340100.htm |archive-date=6 November 2009 |url-status=dead}}</ref><ref name="WB Doc">{{cite web|url=http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/1991/08/23/000009265_3960930195417/Rendered/PDF/multi0page.pdf|title=1991 Country Economic Memorandum|work=World Bank|publisher=India Country Department}}</ref> from the [[International Monetary Fund]] by pledging 67 tons of India's gold reserves as collateral security.<ref name="bail" /><ref name="buy" /> The [[Reserve Bank of India]] had to airlift 47 tons of gold to the [[Bank of England]]<ref name="jolt" /><ref name="circle" /> and 20 tons of gold to the [[Union Bank of Switzerland]] to raise $600 million.<ref name="jolt" /><ref name="circle" /><ref name="swadeshi">{{cite web|url=http://www.rediff.com/money/1998/apr/29fm.htm|title=Only Indians, not foreigners, are exercised over swadeshi: FM|work=Rediff News|access-date=2009-10-20}}</ref> The van transporting the gold to the airport broke down en route due to tyre burst and panic followed .<ref>{{cite web | url=https://economictimes.indiatimes.com/news/economy/finance/when-47-tonnes-of-gold-was-in-the-middle-of-road/articleshow/59447917.cms | title=When 47 tonnes of gold was in the middle of road | work=[[The Economic Times]] |author=Gayatri Nayak | date=5 July 2017 | access-date=21 May 2019}}</ref><ref name="Rawal2018">{{cite book|author=Dr. Tejinder Singh Rawal|title=Loads of Money: Guide to Intelligent Stock Market Investing: Common Sense Strategies for Wealth Creation|url=https://books.google.com/books?id=To-BDwAAQBAJ&pg=PT239|date=20 December 2018|publisher=Partridge Publishing India|isbn=978-1-5437-0457-0|page=239}}</ref><ref name="bail" /> The airlift was done with secrecy as it was done in the midst of the 1991 Indian General elections.<ref>{{cite web | url=https://indianexpress.com/article/explained/in-fact-how-govts-pledged-gold-to-pull-economy-back-from-the-brink/ | title=In fact: How govts pledged gold to pull economy back from the brink | work=The Indian Express|author=Shaji Vikraman | date=5 April 2017 | access-date=21 May 2019}}</ref> National sentiments were outraged and there was public outcry when it was learned that the government had pledged the country's entire gold reserves against the loan.<ref name="jolt" /><ref name="pti" /> A chartered plane ferried the precious cargo to [[London]] between 21 May and 31 May 1991, jolting the country out of an economic slumber.<ref name="jolt" /> The [[Chandra Shekhar]] government had collapsed a few months after having authorised the airlift.<ref name="jolt" /> The move helped tide over the balance of payment crisis and kick-started [[P. V. Narasimha Rao]]'s economic reform process.<ref name="circle" />

=== Under Narsimha Rao Government===
[[P. V. Narasimha Rao]] took over as [[Prime Minister of India|Prime Minister]] in June, and appointed [[Manmohan Singh]] as [[Finance Minister of India|Finance Minister]].<ref name="jolt" /> The [[Rao ministry|Narasimha Rao government]] ushered in several reforms that are collectively termed as [[Economic liberalisation in India#Narasimha Rao government .281991–1996.29|liberalisation]] in the Indian [[Mass media|media]].

The reforms formally began on 1 July 1991 when RBI devalued Indian Rupee by 9% and by a further 11% on 3 July. It was done in two doses to test the reaction of the market first by making a smaller depreciation of 9%.<ref>{{Cite web|url=https://www.livemint.com/Money/08f2pqhy1c2Yh2OYTItwDL/Indias-tryst-with-currency-devaluation.html|title=India's tryst with currency devaluation|website=livemint.com}}</ref> There was significant opposition to such reforms, suggesting they were 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 [[International Monetary Fund|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."<ref>[https://www.nytimes.com/1991/06/29/world/economic-crisis-forcing-once-self-reliant-india-to-seek-aid.html Economic Crisis Forcing Once Self-Reliant India to Seek Aid], New York Times, 29 June 1991</ref> The foreign reserves started picking up with the onset of the liberalisation policies and reached an all-time high US $530.268 billion as on 13 November 2020<ref>{{Cite web|title=Reserve Bank of India - Weekly Statistical Supplement|url=https://m.rbi.org.in/Scripts/WSSView.aspx?Id=24154|access-date=2020-11-26|website=m.rbi.org.in}}</ref>

== Aftermath ==
The program of economic policy reform which was put in place in 1990 has yielded amazing results, dramatically improving the quality of life in India.
Trade liberalisation in India has also corresponded with a dramatic rise in inequality and associated social issues.<ref>https://counterview.org/2018/04/04/gini-of-wealth-in-india-in-2017-is-at-0-83-which-puts-india-among-countries-with-high-inequality/</ref>

The Indian GDP rose from $266 billion in 1991 (inflation adjusted) to $3 trillion in 2019 (1100% increase) while its [[purchasing power parity]] rose from $1 trillion in 1991 to $12 trillion in 2019 (1100% increase).

== See also ==
*[[Economic liberalisation in India]]
*[[Corruption in India]]
*[[Economic history of India]]
*[[Economy of India]]
*[[License Raj]]
*[https://www.the1991project.com/ The 1991 Project]

== References ==
{{Reflist}}

{{Financial crises}}

{{DEFAULTSORT:1991 India Economic Crisis}}
[[Category:Economic history of India (1947–present)]]
[[Category:History of the Republic of India]]
[[Category:1991 in India|India Economic Crisis, 1991]]
[[Category:Rao administration]]
[[Category:Chandra Shekhar administration]]
[[Category:Economic crises]]
[[Category:Samajwadi Janata Party (Rashtriya)]]
[[Category:1991 in Indian economy]]