4. Economic Crisis – Early 1990s

India faced a full-scale macroeconomic crisis in the early 1990s that reached its climax in 1991. The crisis was marked by high inflation, rising food prices, large current account deficit, huge domestic and foreign debt, a sharp fall in the foreign exchange reserves, a steep decline in India’s credit rating, and a cut off of commercial loans accompanied by a net outflow of NRI (Non-Resident Indian) deposits.

The long-term constraints of the preceding decades, especially the 1980s, combined with certain immediate factors gave rise to this economic crisis. The Nehru-Mahalanobis strategy of import substitution-industrialization made the Indian industry inefficient and technologically backward due to the absence of competition. Due to the discouragement of foreign capital, India could not get the benefits of technology and competition. Heavy regulation of private sector through the system of licenses and permits caused a great damage to entrepreneurship and innovation. The public sector that dominated this strategy became highly inefficient and even sick due to excessive political interference. The preoccupation of the strategy with self- sufficiency caused export pessimism. This heavy industry strategy required huge imports of capital goods. Due to large imports of capital goods and foodgrain combined with little exports, the trade deficit increased. Instead of making necessary modifications according to the changing world situation, the government itself caused fiscal deterioration in the 1980s through: (a) populist policies, (b) rapid growth of state controls over the economy, and (c) reservation of certain areas for small-scale industries. The Gulf Crisis of 1990 came as an external shock to the Indian economy, which was in a highly vulnerable state.