1991 Indian economic crisis

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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] 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.[1]

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.[2]

The Chandrasekhar government could not pass the budget in February 1991[3] after 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.[4] 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.[5][6][7]

In an attempt to seek an economic bailout from the IMF, the Indian government airlifted its national gold reserves.[8]

The crisis, in turn, paved the way for the liberalisation of the Indian economy, since one of the conditions stipulated in the World Bank and IMF loan (structural reform), required India to open itself up to participation from foreign entities in its industries, including its state-owned enterprises.[9][10]

The program of economic policy reform which was put in place in 1990 has yielded good results, dramatically improving the quality of life in India. It also 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.[11]

Causes and conscious[edit]

The crisis was caused by currency overvaluation;[2] the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.[12][13][14]

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.[15] 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 (centre and states) rose from 9.0 percent of 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.[16]

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.


With India’s foreign exchange reserves at $1.2 billion in January 1991[17][18][19] and depleted by half by June,[19] barely enough to last for roughly 3 weeks of essential imports,[18][20] India was only weeks away from defaulting on its external balance of payment obligations.[18][19]

Government of India's immediate response was to secure an emergency loan of $2.2 billion[21][22][23] from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral security.[8][22] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England[15][17] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.[15][17][24]  The van transporting the gold to the airport broke down en route due to tyre burst and panic followed .[25][26][8] The airlift was done with secrecy as it was done in the midst of the 1991 Indian General elections.[27] 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.[15][20] A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber.[15] The Chandra Shekhar government had collapsed a few months after having authorised the airlift.[15] The move helped tide over the balance of payment crisis and kick-started P. V. Narasimha Rao's economic reform process.[17]

Under Narsimha Rao Government[edit]

P. V. Narasimha Rao took over as Prime Minister in June, and appointed Manmohan Singh as Finance Minister.[15] The Narasimha Rao government ushered in several reforms that are collectively termed as liberalisation in the Indian 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%.[28] 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 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."[29] 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[30]


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.[31]

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[edit]


  1. "India - Structural Adjustment Credit Project (English) - Presidents report". documents.worldbank.org. World bank. Retrieved 30 October 2018.
  2. 2.0 2.1 "What Caused the 1991 Currency Crisis in India?" (PDF). International Monetary Fund. VALERIE CERRA and SWETA CHAMAN SAXENA.
  3. Yashwant Sinha (29 July 2016). "1991, the untold story". The Hindu. Retrieved 21 December 2018.
  4. "Two months that changed India". Business Standard. 20 January 2013. Retrieved 3 August 2021.
  5. Deepak Nayar (18 October 2016). "How the economy found its feet". The Hindu. Retrieved 21 December 2018.
  6. Shaji Vikraman (5 April 2017). "In fact: How govts pledged gold to pull economy back from the brink". The Indian Express. Retrieved 21 December 2018.
  7. Stuart Corbridge; John Harriss (2013). Reinventing India: Liberalization, Hindu Nationalism and Popular Democracy. Wiley. p. 144. ISBN 978-0-7456-6604-4.
  8. 8.0 8.1 8.2 "I think a stimulus package is necessary, yes. Bailouts, no". Rediff News. Retrieved 20 October 2009.
  9. "Structural adjustments in India - a reportof the Independent Evaluation Group (IEG)". lnweb90.worldbank.org. World bank. Archived from the original on 9 May 2019. Retrieved 30 October 2018.
  10. "How WB,IMF got India to adopt reforms in 1991". The Indian Express. 17 September 2010. Retrieved 28 January 2022.
  11. "World Inequality Database - India". World Inequality Database. Archived from the original on 9 January 2017.
  12. Pathways Through Financial Crisis: India Archived 25 October 2013 at the Wayback Machine, Arunabha Ghosh, Global Governance 12 (2006), 413–429.
  13. India's Pathway through Financial Crisis Archived 12 November 2011 at the Wayback Machine. Arunabha Ghosh. Global Economic Governance Programme. Retrieved on 2 March 2007.
  14. "findebookee.com". findebookee.com. Archived from the original on 1 February 2014. Retrieved 21 January 2019.
  15. 15.0 15.1 15.2 15.3 15.4 15.5 15.6 "India shining, India scraping". The Telegraph. Archived from the original on 6 November 2009. Retrieved 20 October 2009.
  16. "Project proposal - Structured adjustment of India". documents.worldbank.org. World Bank. Retrieved 30 October 2018.
  17. 17.0 17.1 17.2 17.3 Rajghatta, Chidanand; Sinha, Prabhakar (4 November 2009). "Full circle: India buys 200 tons gold from IMF". Rediff News. Retrieved 20 October 2009.
  18. 18.0 18.1 18.2 "Why India bought IMF gold". Rediff News. Archived from the original on 6 November 2009. Retrieved 20 October 2009.
  19. 19.0 19.1 19.2 "RBI to buy 200 tonnes of IMF gold". LiveMint. Archived from the original on 3 November 2009. Retrieved 20 October 2009.
  20. 20.0 20.1 "RBI's gold buying has its own sentimental value: FM". PTI. Archived from the original on 6 November 2009. Retrieved 20 October 2009.
  21. Meredith, Robyn (2007). The Elephant and the Dragon. W. W. Norton & Company. ISBN 978-0-393-06236-6.
  22. 22.0 22.1 "RBI buys 200 tonnes of gold from MF". The Hindu. Archived from the original on 6 November 2009. Retrieved 20 October 2009.
  23. "1991 Country Economic Memorandum" (PDF). World Bank. India Country Department.
  24. "Only Indians, not foreigners, are exercised over swadeshi: FM". Rediff News. Retrieved 20 October 2009.
  25. Gayatri Nayak (5 July 2017). "When 47 tonnes of gold was in the middle of road". The Economic Times. Retrieved 21 May 2019.
  26. Dr. Tejinder Singh Rawal (20 December 2018). Loads of Money: Guide to Intelligent Stock Market Investing: Common Sense Strategies for Wealth Creation. Partridge Publishing India. p. 239. ISBN 978-1-5437-0457-0.
  27. Shaji Vikraman (5 April 2017). "In fact: How govts pledged gold to pull economy back from the brink". The Indian Express. Retrieved 21 May 2019.
  28. "India's tryst with currency devaluation". livemint.com.
  29. Economic Crisis Forcing Once Self-Reliant India to Seek Aid, New York Times, 29 June 1991
  30. "Reserve Bank of India - Weekly Statistical Supplement". m.rbi.org.in. Retrieved 26 November 2020.
  31. "Gini of wealth in India in 2017 is at 0.83, which puts India among countries with high inequality –". Counterview.org. 4 April 2018. Retrieved 14 April 2022.

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