1991 Indian economic crisis

The 1991 Indian economic crisis was an economic crisis in India resulting from a balance of payments deficit due to excess reliance on imports and other external factors.^[1] India's economic problems started worsening in 1985 as imports swelled, leaving the country in a twin deficit: the Indian trade balance was in deficit at a time when the government was running on a huge fiscal deficit (although the twin-deficit hypothesis is disputed).^[2]

The fall of the Eastern Bloc, which had trade relations with India and allowed for rupee exchange, posed significant issues. Towards the end of 1990, leading up to the Gulf War, the situation became dire. India's foreign exchange reserves were not enough to finance three weeks' worth of imports. Additionally, the Gulf War, specifically the conflict between Iraq and Kuwait, caused a significant shift in the trade deficit as India relied on these nations for crude oil. The surge in crude oil prices further exacerbated the imbalance in India's balance of payments. Meanwhile, the government was on the brink of defaulting on its financial obligations. In July of that year, the rupee experienced a sharp depreciation/devaluation due to the low reserves, which further worsened the twin deficit problem.^[3]

In February 1991, the Chandrasekhar government was unable to pass the budget after Moody's downgraded India's bond ratings.^[4] The ratings declined further due to the unsuccessful passage of the budget, making it increasingly challenging and expensive for India to borrow money from international capital markets. This placed additional pressure on the country's economy.^[5] The International Monetary Fund (IMF) suspended its loan program to India, and the World Bank also discontinued its assistance. These actions limited the government's options to address the crisis and forced it to take drastic measures to avoid defaulting on its payments.^[6][7][8]

To address the economic crisis, the government implemented various measures, including the pledge of a significant portion of India's gold reserves to the Bank of England and the Union Bank of Switzerland as collateral. The aim of this move was to secure much-needed foreign exchange to meet India's debt obligations and stabilize the economy. However, this decision was not without controversy and was seen by some as a drastic and desperate move. Critics viewed the decision to mortgage the country's gold as a sign of the government's limited options and inability to manage the crisis effectively.^[9]

The economic crisis created a situation where India had to accept the conditions imposed by the World Bank and the IMF, which included structural reforms. As a result, the Indian economy was opened up to foreign participation in various sectors, including state-owned enterprises. This move towards liberalization was seen by some as necessary to secure much-needed funds and prevent defaults on its loan payments. However, it also led to concerns about the impact of foreign entities on India's economy and the potential loss of control over vital industries.^[10][11]

India's liberalization policies since 1991 have led to significant economic growth and integration into the global economy, but have also faced criticism for uneven distribution of benefits, austerity, unemployment and negative impacts on the environment.^[12]