1. In 1991, India faced an exceptionally severe balance of payments crisis that pushed the country to near bankruptcy. India's central bank had refused new credit and foreign exchange reserves had reduced to the point that India could barely finance three weeks of imports.
2. In response to the crisis, the Indian government signaled a systemic shift to a more open economy with market-oriented reforms. Reforms included liberalizing trade and investment, reducing import restrictions and licensing, selling state-owned businesses to private investors, and allowing more foreign participation in the economy.
3. The reforms helped shift India away from a state-run economy and toward market-based policies that emphasized private sector growth, international trade, and greater reliance on
2. ECONOMIC CRISIS 1991
In 1991, in the wake of an exceptionally severe balance of payments crisis. The
need for a policy shift had become evident much earlier, as many countries in
east Asia achieved high growth and poverty reduction through policies which
emphasized greater export orientation and encouragement of the private sector.
India took some steps in this direction in the 1980s, but it was not until 1991 that
the government signaled a systemic shift to a more open economy with greater
reliance upon market forces, a larger role for the private sector including foreign
investment, and a restructuring of the role of government. The government was
close to default, its central bank had refused new credit and foreign exchange
reserves had reduced to such a point that India could barely finance three
weeks' worth of imports. India had to airlift its gold reserves to pledge it with
International Monetary Fund (IMF) for a loan.
3. WHAT HAD HAPPENED !
A Balance of Payments crisis in 1991 which pushed the country to
near
bankruptcy. The Rupee devalued and economic reforms were forced
upon India. India central bank had refused new credit and foreign
exchange reserves had reduced to the point that India could barely
finance three weeks' worth of imports.
1. Almost all countries in the world depend on the global economy for a
wide variety of things. For India, we depend on West Asia for our oil,
South Africa for our gold, US for our technology, South east Asia for
vegetable oil etc. To buy these items from the world market, we need
US dollars - the global currency of trade. The only way to earn dollars is
by selling enough of our stuff in the global economy (exports).
2. Meanwhile, there was Saddham Hussain who had his misadventure
into Kuwait in 1990. This led US to war with Iraq in early 1991. Oil fields
started to burn and ships found it hard to reach Persian gulf. Iraq and
Kuwait were our big suppliers of oil. The war led to destruction of our oil
imports and the prices shot up substantially - doubling in a few months.
Gulf War and 1990 oil price shock
3. Effect on indian economy due to political crisis.
4. Indian Policy Response To Economic Cris
1. We did away with many of the import restrictions. Until 1991, we
imposed a 400% customs duty on many products. Industries had to
beg to get an essential ingredient imported. By 1991, the duties on
many products were reduced substantially. This brought new growth in
our industries.
2. Import licensing was abolished. Until 1991, you need a license to
import anything and this license was very hard to get.
3. Government did away with the production licensing in many
industries. Until 1991, you needed government's permission in what to
produce and how much to produce. In one stroke, the restriction was
removed in many industries.
4. Rao put domestic economic back on track with two stars - Montek
Singh and Manmohan Singh. Huge spur was given to our local
industries. Stock market rules were relaxed.
5. Manmohan abolished "gold smuggling" (remember 1980s Bollywood
movies?) in one go. He effectively allowed Indian expats to bring back
5 kilos of gold with them with no duty. Now, nobody had a reason to
smuggle gold & electronics.
5. 6. Allowance of foreign investors to come. Suddenly, Bombay Stock
Exchange found a life.
7. Government started selling some of its businesses to the private. This
brought cash and new round of efficiency.
8. Industrial de-licensing followed shortly afterward.
9. The MRTP Act (that protected businesses from monopolies) was
reformed and India could finally be on the path to producing
competitive and productive industries.
10. Gradual reduction of import duties followed, allowing foreign
investments to slowly start flowing in. More clearance was given to
capital goods.
11. Slowly, taxes were lowered (income and corporate taxes) and
Foreign Technology Agreements started getting signed.
12. In cities where the population was less than a million, they didn't
even need Government permits for industries.
13. The threats of massive layoffs were avoided by legislating
judiciously and exercising regulations carefully.
6. Reforms By Regulatory
Bodies
Reduction in SLR and CRR.
High capital adequacy ratio.
NPA and income recognition norms.
Promoting micro finance to increase
financial inclusion.
Setting up of Rural Infrastructure
Development Fund (RIDF).
End of administered interest rate
regime.