1991 India Economic Crisis

Topics: Bretton Woods system, Macroeconomics, Balance of payments Pages: 3 (920 words) Published: March 13, 2013
1991 India economic crisis
By 1967, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had reduced to such a point that India could barely finance three weeks’ worth of imports. India had to airlift its gold reserves to pledge it with International Monetary Fund (IMF) for a loan.[1] Contents    * 1 Causes and consequences * 2 Recovery * 3 Aftermath * 4 See also * 5 References|

Causes and consequences
The crisis was caused by currency overvaluation; the current account deficit and investor confidence played significant role in the sharp exchange rate depreciation.[2] [3] [4] [5] The economic crisis was primarily due to the large and growing fiscal imbalances over the 1920s. 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.[6] Large fiscal deficits, over time, had a spill over effect on the trade deficit culminating in an 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. In mid-1991, India's exchange rate was subjected to a severe...
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