How it all began?

After the death of Indira gandhi in 1984 Rajiv Gandhi her son tookover the govt with a huge
majoirity.In 1989 he lost the election due to a divorce case which was very political in nature
and allegations of the oppositions for kickbacks in Bofors Deal.
After 1989 no govt could stay for long enough to bring stability to the Indian Political as well
as economic system of India.Numbers of PM were sworn in but to no avail.During all the
political chaos in the country the economic system of India wasnt given much
attention.Along with political chaos there was chaos all around the globe concerning the Gulf
war and the collapse of Soviet Union.
Sub topic OTHER REASONS

Break-up of the Soviet Bloc: Rupee trade (payment for trade was
made in rupees) with the Soviet Bloc was an important element of
Indias total trade up to the 1980s. However, the introduction of
Glasnost and Perestroika and the break-up of the Eastern European
countries led to termination of several rupee payment agreements in
1990-91. As a consequence, the flow of new rupee trade credits
declined abruptly in 1990-91. Further, there was also a decline in our
exports to Eastern Europethese exports constituted 22 .1 percent of
total exports in 1980 and 19.3 percent in 1989; but they declined to 17.9
percent in 1990-91 and further to 10.9 percent in 1991-92.
Iraq-Kuwait War: The Gulf crisis began with the invasion of Kuwait by
Iraq at the beginning of August 1990. Crude oil prices rose rapidly
thereafterfrom USD 15 per barrel in July 1990 to USD 35 per barrel in
October 1990. Iraq and Kuwait were the major sources of Indias oil
imports and the war made it necessary to buy oil from the spot market.
Short term purchases from the spot market had to be followed up by
new long term contracts at higher prices. As a result, the oil import bill
increased by about 60 percent in 1990-91 and remained 40 percent
above the 1989-90 level the next year. As noted in Economic Survey
(1991-92):
"The immediate cause of the loss of reserves beginning in September
1990 was a sharp rise in the imports of oil and petroleum products
(from an average of $ 287 million in June-August 1990, petroleum
products imports rose sharply to $ 671 million in 6 months). This
accounted for rise in trade deficit from an average of $ 356 million per
month in June-August 1990 to $ 677 million per month in the following 6
months."
Political Uncertainty and Instability: The period from November 1989
to May 1991 was marked with political uncertainty and instability in
India. In fact, within a span of one and half years there were three
coalition governments and three Prime Ministers. This led to delay in
tackling the ongoing balance of payment crisis, and also led to a loss of
investor confidence.

 Fiscal Indiscipline: The Economic Survey (1991-92) had categorically

remarked that:
Throughout the eighties, all the important indicators of fiscal
imbalances were on the rise. These were the conventional budgetary
deficit, the revenue deficit, the monetized deficit and gross fiscal deficit.
Moreover, the concept of fiscal deficit is a more complete measure of
macroeconomic imbalance as it reflects the indebtedness of the
Government. This gross fiscal deficit of the Central Government has
been more than 8 percent of GDP since 1985 86, as compared with 6
percent in the beginning of 1980s and 4 percent in the mid 1970s.
Loss of Investors Confidence: The widening current account deficits
and reserve losses contributed to low investor confidence, which was
further weakened by political uncertainty. This was aggravated by the
downgrade of Indias credit rating by credit rating agencies. By March
1991, the International Credit Rating agencies Standard & Poors, and
Moodys, had downgraded Indias long term foreign debt rating to the
bottom of investment grade. Due to the loss of investors confidence,
commercial bank financing became hard to obtain, and outflows began
to take place on short-term external debt, as creditors became reluctant
to roll over maturing loans.
Increase in Non-oil Imports: The trends in imports and exports show
that imports rose much faster than exports during the eighties. Imports
increased by 2.3 percent of GDP, while exports increased by only 0.3
percent of GDP. As a consequence, trade deficit increased from an
average of 1.2 percent of GDP in the seventies, to 3.2 percent of GDP
in eighties.

Oil and Non- Oil Imports (In Rs. Crores)

Rise in External Debt: In the second half of the 1980s, the current
account deficit was showing a rising trend and was becoming
unsustainable. An important issue was the way in which this deficit was
being financed. The current account deficit was mainly financed with
costly sources of external finance such as external commercial
borrowings, NRI deposits, etc.

In the context of external debt the following observations are worth

considering:0
The period of eighties was marked by a reduction in flows of
concessional assistance to India, principally from the World Bank
Group. In 1980, disbursements on concessional terms constituted
more than 89 percent of assistance to India from multilateral
sources; in 1990, this proportion declined to about 35 percent
Due to a decline in concessional assistance there was a rise in
average interest cost of external borrowing
There was a change in the composition of debt as it shifted from
official (like bilateral sources) to private sources like external
commercial borrowings (ECBs) and NRI deposits. These private
sources were costlier
The external debt was funneled into financing the governments
deficit
Indias external debt increased from Rs. 194.70 crore (USD 23.50
billion) in 1980-81 to Rs. 459.61 crore (USD 37.50 billion) in 1985
86. It went up to Rs. 1,003.76 crore (USD 58.63 billion) in 1989-90.
In 1990-91, it was Rs. 1,229.50 crore (USD 63.40 billion)
TITLE ECONOMIC POLICIES
b)Protectionist Policies- defined objective of self reliance through industrialization and import
substitution
Focus was on substituting imports and promoting domestic industries by heavy intervention
while a gross negligence on exports
b)External Debt- The development projects caused a large scale foreign borrowing which
created pressure on the government.From 1980-83 the oil shock boosted the import
significantly leading to more deficit in trade.
As India was opening step by step more and more capital goods were purchased leading to
payment in forex which adversly affected the forex reserve.

Export promotion- Indian exports were largely dependent on world trade

situation due to predominance of primary goods in trade mix combined
with lower quality standards.
Depreciating rupee along with other policy incentives to exporters acted as a supporting factor for
Indias exports. At the same time, invisible receipts grew sharply stemming from workers remittances
from the Middle East. Consequently, the current account balance turned into surplus in 1976-77 and
1977-78.
Thus, the private transfers added a new positive dimension to Indias BoP after the first oil shock.
Further, with the official exchange rate nearly converging to market exchange rate, there was not
much incentive for routing remittances through unofficial exchange brokers. The rapid growth of
private transfers reinforced the trade account adjustment to make the current account situation much
more comfortable

Even after several promotion of export the growth remained stagnant due to external factors.First,
despite a number of export promotion measures, the subdued growth conditions in the world economy
constrained exports growth. Second, the surplus on account of invisibles also deteriorated due to
moderation in private transfers. Third, the debt servicing had increased with greater recourse to debt
creating flows such as external commercial borrowings (ECBs) and non-resident Indian (NRI)
deposits.

Exchange rate- Fixed exchange rate was followed and constant

devaluations by the central bank to promote exports raised the amount
of external debt.

BOP FROM 1980s

The balance of payments position has recorded a total change since 197980. India started to record a heavy deficit in its balance of payments since
1979- 80. One of the reasons beign the oil shock of 1980-83.
Thus the table reveals that due to the mounting deficit in trade balance, i.e.,
from Rs. 5,967 crore in 1980-81 to Rs. 6,721 crore in 1984-85, India
maintained a huge deficit in its balance of payments to the extent of Rs.
11,384 crore during the Sixth Plan period. Again due to a persistent
growing deficit in trade balance the cumulative deficits in the balance of

payment during the Seventh Plan rose further to Rs. 38,313 crores,
showing the annual average deficit of Rs. 7,662 crore.
Again in 1990-91, total amount of deficits in the balance of payments was
as high as Rs. 17,369 crore. But in 1999-2000 and 2000-2001, the total
amount of deficits in the balance of payments was Rs. 20,331 crore and
Rs. 11,431 crore respectively. In 2001-02, total surplus in BOP was Rs.
16,426 crore and the total surplus further increased to Rs. 47,952 crore in
2003-04. In 2008-09, total deficit in BOP was Rs. (-) 1,31,614 crore.
This huge deficit in the balance of payments position during the entire
Sixth, Seventh and Eighth and Ninth Plan periods was the result of
tremendous rate of growth of imports accompanied by a poor rate of growth
of exports. The trade deficits during these four plans were so heavy that it
could not be offset by the flow of funds under net invisibles. The following
table depicts a clear picture about the amount of deficits in the balance of
payments from the First Plan to the Ninth Plan