The Indian Economy Crisis of 1991

In 1951, 77.4 % of our population was provided livelihood by Agriculture so India was an Agrarian economy.

  • There was menace of Zaminadari which was introduced by Lord Cornwallis in Bengal in 1773, and was abolished in 1950, during the First Five Year Plan. The Industry was given top priority in the second five year plan.

Nehru is known to have realized the importance of the private sector but also containing their growth as “private enterprise on big scale leads to private monopolies”. So, obviously Public Sector was given due importance in the Industrial Policies of India. But India was known for lavish spending. The result was a bad effect on the country which some experts call “Nehru’s Folly“. The path could be changed but was not changed. These impacts were:

  1. India was not able to afford the huge investments required for the Big Industries. In 1947, the deposit of ` 3450 Crore of the country was spent lavishly and was turned into a debt in due course of time. This debt never came down and loans piled up.
  2. Except the first plan, the growth in agriculture was not satisfactory and it was never above 2-3 % during Nehru Era.
  3. The Huge Industries did not generate employments. The use of machines curtailed the human labour and it was against the “dream of Gandhi who wanted to make every village an independent unit. Ample Human Resource was never utilized in India promptly as in case of some war devastated courtiers like Japan.
  4. Public sector soon came under the grip of corruption and red tape.
  5. The disparity between the rich and poor was not removed and it kept increasing.
  6. Imports could not be contained and there balance of trade was never in favor of India.

The successive governments took measures and a process of slow liberalization was set off. It took India 4 decades to liberalize the economy in a proper way.

In early 1990s, India came under sudden Political Instability. In November 1989, Rajiv Gandhi was defeated and this was basically an end of long term “Centrism” in Politics of the Country. VP Singh, who was also known as architect of Liberalization in 1980s became the Prime Minister, leading a minority coalition.

On 2 August 1990, Iraqi forces invaded and annexed Kuwait. Saddam Hussein, then President of Iraq, deposed the Amir of Kuwait, Jaber Al-Sabah, and installed Ali Hassan al-Majid as the new governor of Kuwait.

The Iraqi occupation of Kuwait pushed up the Oil Prices and 1.5 Lakhs of Indians in Kuwait lost their jobs as well as savings.

At home, Devi Lal was eager to replace VP Singh and VP Singh played the game of achieving short term election benefits. Important feature of this populist game were the “Mandal Issue” to woo the OBCs and peasantry class which in North India was more or less represented by Devi Lal. Another economically important feature was waiving of agriculture loans in 1990. The peasants got rid of the debts but badly damaged the condition of the agriculture credit in the country. This waiver was financed by the government by increasing the Budget Deficit. The peasants paid nominal amounts and there was no substantial contribution on Government accounts. V P Singh government (Finance Minister was Madhu Dandwate) failed in this game of short term political gains.

Increase in the Oil Prices swept the Foreign Currency Reserves of the country. The NRIs withdrew the funds and in October 1990, flow of NRI deposits turned negative. The Credit rating got negative and India was on the verge of defaulting its international Commitments.

There was an effort made by Chandrashekhar Government to stop this crisis, by asking the IMF for a loan of 33.3 billion rupees. So ultimately India was forced by circumstances to borrow against the security of the Gold Reserves. In 1991, the Chandrashekhar government was toppled by the Congress, partially due to a sympathy wave in the country, on account of assassination of Rajiv Gandhi. In 1991, Currency was devaluated and this followed partial convertibility of Rupee (Both these terms are studied in our Public Finance Modules).

The new government under P V Narsimha Rao (who before this appointment, was thinking to retire) and Finance Minister Dr. Man Mohan Singh, presented an emergency budget in July 1991. In this budget following announcements were made:

  1. The Budget was aimed at reducing the Budget Deficit by cutting the subsidies and raising the administered prices. Price of the fertilizers was increased by a whopping 30%.
  2. The Budget announced privatization of 20% of selected PSU’s and it was expected to raise ` 25 billion by this.
  3. The tax rates were revised and this would generate additional ` 20 Billion.
  4. Rupee was devaluated by 18% in two steps.
  5. Government borrowed ` 22.2 billion from IMF in July & September 1991.

The result was

  1. The negative flow in foreign remittances by NRIs contained.
  2. The ` 25 billion Foreign exchange rose to ` 95 billion by the end of the year.

This was enough for the government to announce more measures and take the country to the path of liberalization.

Role of IMF:

During the crisis, the financial support did not come from India without a cost. It had some tags of conditions such as restructuring the economy, devaluation of rupee and liberalization of the economy.

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