1991 Indian economic crisis

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The 1991 Indian economic crisis had its roots in 1985 when India began having balance of payments problems 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 large fiscal deficit. By the end of 1990 in the run-up to the Gulf War, the situation became so serious that the Indian foreign exchange reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations. By July that year, the low reserves had led to a sharp devaluation of the rupee, which in turn exacerbated the twin deficit problem.[1] This led the government to airlift national gold reserves as a pledge to the International Monetary Fund (IMF) in exchange for a loan to cover balance of payment debts.[2]

The crisis later led to the liberalisation of the Indian economy.

Causes and consequences[edit]

The crisis was caused by currency devaluation;[3] the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.[4][5][6]

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the 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.[7] 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 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.

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 expending 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[8][9][10] and depleted by half by June,[10] barely enough to last for roughly 3 weeks of essential imports,[9][11] India was only weeks away from defaulting on its external balance of payment obligations.[9][10]

Government of India's immediate response was to secure an emergency loan of $2.2 billion[12][13][14] from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral security.[2][13] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England[7][8] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.[7][8][15] 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.[7][11] It was later revealed[according to whom?] that the van transporting the gold to the airport broke down en route and panic followed.[2] A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber.[7] The Chandra Shekhar government had collapsed a few months after having authorised the airlift.[7] The move helped tide over the balance of payment crisis and kick-started P.V. Narasimha Rao’s economic reform process.[8]

P. V. Narasimha Rao took over as Prime Minister in June, and roped in Manmohan Singh as Finance Minister.[7] The Narasimha Rao government ushered in several reforms that are collectively termed as liberalisation in the Indian media. 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." [16] The foreign reserves started picking up with the onset of the liberalisation policies and reached an all-time high US$ 426.1 billion as on 13th of April 2018 [17]

18 years after the incident, in 2009, India bought 200 Metric tons of gold from International Monetary Fund,which was nearly three times the amount which India pawned to IMF in 1991 proving the fact that the economic reforms had worked wonders. [18]


A program of economic policy reform 1991 was put in place which has yielded mixed results so far.

See also[edit]


  1. ^ "What Caused the 1991 Currency Crisis in India?" (PDF). International Monetary Fund. VALERIE CERRA and SWETA CHAMAN SAXENA. 
  2. ^ a b c "I think a stimulus package is necessary, yes. Bailouts, no". Rediff News. Retrieved 2009-10-20. 
  3. ^ "What Caused the 1991 Currency Crisis in India?" (PDF). International Monetary Fund. VALERIE CERRA and SWETA CHAMAN SAXENA. 
  4. ^ Pathways Through Financial Crisis: India Archived 25 October 2013 at the Wayback Machine., Arunabha Ghosh, Global Governance 12 (2006), 413–429.
  5. ^ 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.
  6. ^ http://findebookee.com/c/crisi-in-india
  7. ^ a b c d e f g "India shining, India scraping". The Telegraph. Archived from the original on 6 November 2009. Retrieved 2009-10-20. 
  8. ^ a b c d Rajghatta, Chidanand; Sinha, Prabhakar. "Full circle: India buys 200 tons gold from IMF". Rediff News. Retrieved 2009-10-20. 
  9. ^ a b c "Why India bought IMF gold". Rediff News. Archived from the original on 6 November 2009. Retrieved 2009-10-20. 
  10. ^ a b c "RBI to buy 200 tonnes of IMF gold". LiveMint. Archived from the original on 3 November 2009. Retrieved 2009-10-20. 
  11. ^ a b "RBI's gold buying has its own sentimental value: FM". PTI. Archived from the original on 6 November 2009. Retrieved 2009-10-20. 
  12. ^ Meredith, Robyn (2007). The Elephant and the Dragon. W. W. Norton & Company. ISBN 0-393-06236-8. 
  13. ^ a b "RBI buys 200 tonnes of gold from MF". The Hindu. Archived from the original on 6 November 2009. Retrieved 2009-10-20. 
  14. ^ "1991 Country Economic Memorandum" (PDF). World Bank. India Country Department. 
  15. ^ "Only Indians, not foreigners, are exercised over swadeshi: FM". Rediff News. Retrieved 2009-10-20. 
  16. ^ Economic Crisis Forcing Once Self-Reliant India to Seek Aid, New York Times, 29 June 1991
  17. ^ https://www.hindustantimes.com/business-news/india-s-forex-reserves-at-a-life-time-high-of-426-082-billion/story-VN1S40wNLq6LG3thW1Eb6O.html
  18. ^ http://m.timesofindia.com/business/india-business/Full-circle-India-buys-200-tons-gold-from-IMF/articleshow/5194338.cms