1991 Indian economic crisis

The crisis was caused by currency overvaluation;[2] the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.[9][10][11]

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-eighties, India started having the 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.[12] 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 Gross Domestic Product (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.[13]

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 expanding 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[14][15][16] and depleted by half by June,[16] barely enough to last for roughly 3 weeks of essential imports,[15][17] India was only weeks away from defaulting on its external balance of payment obligations.[15][16]

Government of India's immediate response was to secure an emergency loan of $2.2 billion[18][19][20] from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral security.[7][19] The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England[12][14] and 20 tons of gold to the Union Bank of Switzerland to raise $600 million.[12][14][21]  The van transporting the gold to the airport broke down en route due to tyre burst and panic followed .[22][23][7] The airlift was done with secrecy as it was done in the midst of the 1991 Indian General elections.[24] 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.[12][17] A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber.[12] The Chandra Shekhar government had collapsed a few months after having authorised the airlift.[12] The move helped tide over the balance of payment crisis and kick-started P.V. Narasimha Rao's economic reform process.[14]

The program of economic policy reform which was put in place in 1991 has yielded amazing results, dramatically improving the quality of life in India. Trade liberalisation in India has also corresponded with a dramatic rise in inequality and associated social issues, but these are normal for a developing economy.[28]

The Indian GDP rose from $266 billion in 1991 (inflation adjusted) to $3 trillion in 2019 (1100% increase) while its purchasing power parity rose from $1 trillion in 1991 to $12 trillion in 2019 (1100% increase).

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