1991 Indian economic crisis Towards the end of 1980s, India was facing a Balance of Payments (BoP) crisis, due to unsustainable borrowing and high expenditure. The Current Account Deficit (3.5 percent) in 1990-91 massively weakened the ability to finance deficit. Macroeconomic Indicators and Balance of Payments Situation in 1990-1991: The trade deficit increased from Rs. 12,400 crore in 1989-90 to Rs. 16,900 crore in 1990-91. The current account deficit increased from Rs. 11,350 crore in 1989-90 to Rs. 17,350 crore in 1990-91. The CAD/GDP ratio increased from 2.3 in 1989-90 to 3.1 percent in 1990-91. Besides this, the fiscal deficit to GDP ratio was more than 7 percent during the two years 1989-90 and 1990-91. The foreign exchange reserves, meant to cover import costs for two years (1989-1991),were just sufficient to cover close to two and half months of imports. ‘The average rate of inflation was 7.5 percent in 1989-90, which went up to 10 percent in the year 1990-91. In 1991-92, it crossed 13 percent. The GDP growth rate which was 6.5 percent in 1989- 90, went down to 5.5 percent in 1990-91. The Balance of Payments crisis also affected the performance of industrial sector. The average industrial growth rate was 8 percent in the second half of 1980s. In 1989-90, it was 8.6 percent and in 1990-91 it was 8.2 percent. India’s foreign exchange reserves stood at Rs. 5,277 crore on 31 December 1989, which declined to Rs. 2,152 crore by the end of December 1990. Between May and July 1991, these reserves ranged between Rs. 2,500 crore to 3,300 crore. The 1991 Indian economic crisis was an economic crisis in India that resulted from poor economic policies and the resulting trade deficits. India's economic problems started worsening in 1985 as the imports swelled, leaving the country in a twin doficit: the Indian trade balance was in deficit at a time when the government was running on a huge fiscal deficit. 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 of the rupee, which in turn exacerbated the twin deficit problem. The Chandrasekhar government could not pass the budget in February 199lafter Moody downgraded India's bond ratings. The ratings further deteriorated due to the unsuccessful passage of the fiscal budget. This made it impossible for the country to seek short term loans and exacerbated the existing economic crisis. 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. In an attempt to seek an economic bailout from the IMF, the Indian government airlifted its national gold reserves. The crisis, in turn, paved the way for the liberalization 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.Economic Crisis. vad Cyto? A me oe the teonomy is of acount ue __downtwin — baought on by afi Aunaneidl_ A—tasis: An ee mr inflation) deflation- 2 sis Asasons for Fro. Cuisis. 199) i= | 2 9 || IC Domestic Factans: @ falitical dn-stability () Excessive Soctalistic Comme menteeellelels| Date i} ih 2 51 export of dndia Exporis =: 5 =) © Global Recession =. + Collapsed _savi np A anid | Buco of oil increased ee frdian~ economy also. dietedae sae De Basin, of Savin A nee — toma fackons = er peoiod of timo. Se a shaded lye ues emma suse ot> fl FB ‘ [Mo] tu [we] m | [se [sa] Date ra = / (b) Excessive _Socialistic Commitments‘ Je: + Economy based _on _Socialsfie fatten + 4 led tothe slowdoton of he _econom r tose scale industries fad great im portagnce ay 0 lange quaritity ef. coptal gocds yaodeds + lot of fueian exchange spent fow importing the: heavy machinontes £ other — capital type ©)_duflation:= a ie ___- pat, + Supply Side inflation-moans_ shoflage. of Supply gd — tach of feed grains £ import these items. 4+ Sach of industvial production dire to lack of firme <___+ approximately _22/. — increase _in_prices of goods. @d) fiscal Deficit 1- ae ania - 4 shows the borrowing -of the govt. 2 tn 6th 2 gth_five yeast_plans, govt: borrowed a sector _as= well_as agricultural, sectors 5 + Thal’s why fiscal dolicit widened: “ - @) Evoston of pileinational Cowdibility := licais® intel sane + dt led do the loch of the sasowces: for the ee a Z + Because of slowdown of economic _adhivities 2 4 ine 7 : ibrlil ipod —_—4G \ W 405 . foes _ ‘ is aeaDale / / @. Ol Poel | Debit: — ir , fue to Gulf war, ca woriees. rene Rete li: » Asan imposrted cau {ndia faced oi! pool deficit widened: «Ability to pay impostts was deel nad-day “hy day: ion Valued Rupee :~ . . dndia adopted the fixed exdange rte _ policy Hee 19a ~ + -Honetany —authosely- / Govt. estimated the value of ___wupee over and abuve _ the basket of cusdencies and gold Jack of demand. of yupee was accused. at ___that__ time. ~ 4H fed to the esosion of rupee value . th) Joss making Publie Secton Undertakings Asus) ___ __ lea bP &Us¢ coymante— was vert bad -£ nit suained- Sc thaslbssh Yeough —sluleyiaina + Onder = poroduchian | __— = fubic_Setgstdmnen- bil net managed ity in the Indian