3.3. Indian Balance of Payments Crisis (1991)

♤ Post 1979 oil shocks, the value of imports in India became almost double between 1978, 1981-82. By the end of the 6th plan, the Current Account Deficit rose.

♤ The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external payments crisis. By the end of 1990, India was in serious economic trouble.

♤ It is said that the foreign exchange reserves had dried up to the point that India could barely finance three weeks’ worth of imports.

♤ In mid-1991, India's exchange rate was subjected to a severe adjustment.

♤ Apart from the external assistance, India had this huge deficit in the current account through the withdrawal of SDR from IMF.

♤ Steps taken to counter the BoP crisis: In 1991, Rupee was devalued. Due to the currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 45 per dollar in 1992. Industries were delicensed. Import tariffs were lowered and import restrictions were dismantled. Indian Economy was opened for foreign investments. Liberalised Exchange Rate Management System, or LERMS, was also introduced in 1992 and India moved from a fixed to a dual exchange rate system. Budget 1993-94 announced a move towards a unified exchange rate or a market-determined management system, marking the transition to convertibility on the current account soon afterward.