Economic Crisis 1991 - Indian Economy Notes

In 1991 the Indian economy faced a severe balance of payments crisis which is otherwise called as Economic crisis in 1991. To counter this economic crisis a wide-ranging economic program was launched, not just to restore the balance of payments but to reform, restructure and modernize the economy. In this article, we will understand the economic crisis of 1991 that is important for a UPSC aspirant.

What was the Economic Crisis of 1991?

• At the time of independence, most of the population was engaged in agriculture as the sole source of livelihood.
• There were problems with the menace of previous policies of the English government such as the zamindari system, etc. Hence, industrial development was given preference during the first and the second five-year plans.
• To prevent private monopolies, the public sector was given importance, this led to lavish spending and an economic crisis.
• This coupled with the international events which increased the price of oil and imports and poor forex reserves gave way to the crisis of 1991.

The ratio of Foreign Exchange Reserve and Avg monthly imports during 1991 crisis

Factors that Led to the Economic Crisis of 1991

• The increase in prices and the inflation rate was also increased from 6.7% to 16.7% led to the country’s economic position.
• The fiscal deficit was increased due to an increase in non-development expenditure, this resulted in a rise in public debt and interest.
• Interest liabilities became 36.4% of total government expenditure.
• Balance of payments increased from Rs. 2214 crore in 1980-81 to 17,367 crores in 1990- 91 to Rs. to fill this deficit a large number of foreign loans were taken.
• Decrease in performance and profits of PSUs.
• India’s foreign exchange reserves decreased in 1990-91 and became insufficient to pay for an import bill for 2 weeks.

Impact of International Events on the Economic Crisis of 1991

• The collapse of the Soviet Union proved that socialism was not suitable as a model to be followed by the Indian economy.
• Industrial revolution in China by the introduction of market-friendly reforms by Deng Xiaoping.
• Gulf war of 1990-91, led to a rise in petrol prices, this reduced the inflow of foreign currency from Gulf countries which further aggravated the problem.
• To bypass the Balance of Payment (BoP) issues, India borrowed huge sums from the International Monetary Fund (IMF).
• The Asian financial crisis of 1997-99 impacted the economic growth of the Indian economy.
• Import of technology was restricted and Foreign Direct Investment (FDI) was discouraged.

Conclusion

During the economic crisis of 1991, the government was forced by circumstances to borrow against the security of the Gold Reserves, this gave way to the devaluation of currency followed by partial convertibility of the rupee. Various international events such as the Gulf war, impacted the inflow of remittances, trade, etc. All this spiraled into what was witnessed as the economic crisis of 1991 in the Indian economy

FAQs

MCQs

Question: Who was the finance minister during the 1991 economic crisis?

(a) Manmohan Singh

(b) PV Narsimha Rao

(c) R Venkataraman

(d) RK Shanmukham Chetty

Question: What was the successor organization of the General Agreement on Trade and Tariffs (GATT)?

(a) World Bank

(b) International Monetary Fund (IMF)

(c) Food and Agricultural Organization (FAO)

(d) World Trade Organization (WTO)