The roots of the 1991 currency crisis in India can be seen during the entire decades that precede it. As a matter of fact it lies in the large and persistent macroeconomic imbalances that developed over the 1980s. A close examination of the government expenditures, over the 1980s, suggests that the cause of the crisis was due to the large and growing fiscal imbalance.
This imbalance finally leads to a large fiscal deficit resulting from an increase of the government expenditures. It finally resulted to a balance of payment crisis. Thanks to Manmohan Singh, the actual Prime minister in India who was the Finance minister at that time, the country managed to successfully take off again through a reform of the economical system. This led us to the following question: How did the 1991 crisis change the economical Policy of India?
I will try to answer to this question by first focusing on the causes of the crisis, we will see that it was caused by India's own government policy as well as international conjuncture and in a second time we try to understand how did the government react and what Policy did they apply.
[...] On the debt aspect, it was reduced and strictly controlled after what foreign exchanges reserves were made and accumulated in a way to provide a greater insurance. To do so the government used emergency solution. The government had not much left, only for 3 months of 5 import of BASIC goods, so not much. It got rid of that to repay part of debts. They for instance sold large gold quantity emergency loan from the IMF by pledging 67 tons of Gold; 47 tons sold to England tons sold to Switzerland. [...]
[...] It was also due to the over investment and political decisions. For instance the higher interest rate on the government bounds and the low inflation rate generate an important speculative bubble. After what we have seen how India managed to get through this crisis by mainly switching its economical policy and opening it borders and selling some of its raw materials such as gold. It also encourages foreign direct investment and portfolio to invest in India. Was this crisis not a compulsory step in India's way of developing and growing, becoming one the future super power of our world? [...]
[...] The decrease in GDP was consequently felt. At the beginning of the 1990's the war in Iraq and the U.S. intervention played an important role on the world conjuncture as Gulf countries were in war, there was subsequently a decrease of the overall trade in the region which used to be purchaser of wood, gold, silver and other Indian goods; India was not prepared to this decrease in trade and was not producing anything that could help either the US or gulf countries (war technology is rarely imported , too dangerous). [...]
[...] Only nonresidents Indian, member of the Diaspora, were allowed and could invest as much as they wanted in India. Therefore there was limited amount of foreign currencies entering in India. As the policy was protectionism prices were kept higher. At the same time exports keep the value of the currency fairly high, thanks to the law of supply and demand theory, because in a way to buy Indian goods people and companies ere obliged to buy rupees. Another important factor that generates the crisis is an import-oriented growth. [...]
[...] The entire Economy is now open to every investor, not only “non resident Indians”, there is less trade barriers (almost none actually). The public sector has been partially privatized bringing funds to the government helping him to recover. After the crisis “Licence Raj” was removed entirely (there was a need a licence for everything if you do regarding business, it was preventing many companies from being created). There was a huge increase in the number of Indian companies, either small or big. [...]
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