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India started having balance of payments problems since 1985, and by the end of 1990, it was in a serious economic crisis. The government was close to default,^[1] its central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks’ worth of imports. India had to airlift gold to pledge it with IMF for a loan.^[2]

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

[edit] Causes and consequences

Crisis was caused by current account deficits and currency overvaluation.

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.^[3] Large fiscal deficits, overtime, had a spill over effect on the trade deficit culminating in a external payments crisis. By the end of 1990, India was in serious economic trouble.

The gross fiscal deficit of the government (center and 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.

Devaluation of Indian Rupee started in 1960s due to the wars with China (1962) and Pakistan (1965). Due to large government budget deficits, drought there was a sharp rise in prices due to inflation. The Indian Government was forced to start liberal policies in order stabilize the economy, which in turn resulted into the huge devaluation of the Indian Rupee. Once again, the government decided to devaluate the rupee. Due to the currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 45 per dollar in 1992. The investor confidence also played significant role in the sharp exchange rate depreciation.^[4]

[edit] Recovery

With India’s foreign exchange reserves at $1.2 billion in January 1991^[5][6][7] and depleted by half by June,^[7] barely enough to last for roughly 3 weeks of essential imports,^[6][8] India was only weeks way from defaulting on its external balance of payment obligations.^[6][7]

The caretaker government in India headed by Prime Minister Chandra Shekhar, and Finance Minister Yashwant Sinha’s immediate response was to secure an emergency loan of $2.2 billion^[9] from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral.^[2][9] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England^[3][5] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.^[3][5][10] National sentiments were outraged and there was public outcry when its was learned that the government had pledged the countries entire gold reserves against the loan.^[3][8] Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed.^[2] A chartered plane ferried the precious cargo to London between May 21 and May 31, 1991, jolting the country out of an economic slumber.^[3] Chandra Shekhar government had collapsed a few months after having authorized the airlift.^[3] The move helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.^[5]

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'.^[3] The Narasimha Rao government ushered in several reforms that are collectively termed as liberalisation in the Indian media. 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.^[11]

[edit] Aftermath

A program of economic policy reform has since been put in place which has yielded very satisfactory results so far. While a lot still remains on the unfinished reform agenda, the prospects of macro stability and growth are indeed encouraging.

[edit] References

[edit] See also

• Economic liberalization in India
• Corruption in India
• Economic history of India
• Economy of India
• License Raj