India started having balance of payments problems since 1985, and by the end of 1990, it

was in a serious economic crisis. The government was close to default,[1] its 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. India had to airlift gold to pledge it
with IMF for a loan.[2]

Contents
[hide]

• 1 Causes and consequences

• 2 Recovery
• 3 Aftermath
• 4 References

• 5 See also

[edit] Causes and consequences

Crisis was caused by current account deficits and currency overvaluation.

The economic crisis was primarily due to the large and growing fiscal imbalances over
the 1980s. During mid eighties, India started having balance of payments problems.
Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit
dried up and investors took their money out.[3] Large fiscal deficits, overtime, had a spill
over effect on the trade deficit culminating in a external payments crisis. By the end of
1990, India was in serious economic trouble.

The gross fiscal deficit of the government (center and states) rose from 9.0 percent of
GDP in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the
center alone, the gross fiscal deficit rose from 6.1 percent of GDP in 1980-81 to 8.3
percent in 1985-86 and to 8.4 percent in 1990-91. Since these deficits had to be met by
borrowings, the internal debt of the government accumulated rapidly, rising from 35
percent of GDP at the end of 1980-81 to 53 percent of GDP at the end of 1990-91. The
foreign exchange reserves had dried up to the point that India could barely finance three
weeks worth of imports.

Devaluation of Indian Rupee started in 1960s due to the wars with China (1962) and
Pakistan (1965). Due to large government budget deficits, drought there was a sharp rise
in prices due to inflation. The Indian Government was forced to start liberal policies in
order stabilize the economy, which in turn resulted into the huge devaluation of the
Indian Rupee. Once again, the government decided to devaluate the rupee. Due to the
currency devaluation the Indian Rupee fell from 17.50 per dollar in 1991 to 45 per dollar
in 1992. The investor confidence also played significant role in the sharp exchange rate
depreciation.[4]
[edit] Recovery
With India’s foreign exchange reserves at $1.2 billion in January 1991[5][6][7] and depleted
by half by June,[7] barely enough to last for roughly 3 weeks of essential imports,[6][8] India
was only weeks way from defaulting on its external balance of payment obligations.[6][7]

The caretaker government in India headed by Prime Minister Chandra Shekhar, and
Finance Minister Yashwant Sinha’s immediate response was to secure an emergency loan
of $2.2 billion[9] from the International Monetary Fund by pledging 67 tons of India's gold
reserves as collateral.[2][9] The Reserve Bank of India had to airlift 47 tons of gold to the
Bank of England[3][5] and 20 tons of gold to the Union Bank of Switzerland to raise $600
million.[3][5][10] National sentiments were outraged and there was public outcry when its
was learned that the government had pledged the countries entire gold reserves against
the loan.[3][8] Interestingly, it was later revealed that the van transporting the gold to the
airport broke down on route and panic followed.[2] A chartered plane ferried the precious
cargo to London between May 21 and May 31, 1991, jolting the country out of an
economic slumber.[3] Chandra Shekhar government had collapsed a few months after
having authorized the airlift.[3] The move helped tide over the balance of payment crisis
and kick-started Manmohan Singh’s economic reform process.[5]

P.V. Narasimha Rao took over as Prime Minister in June, the crisis forcing him to rope in
Manmohan Singh as Finance Minister, who unshackled what was then called the 'caged
tiger'.[3] The Narasimha Rao government ushered in several reforms that are collectively
termed as liberalisation in the Indian media. The forex reserves started picking up with
the onset of the liberalisation policies and peaked to $314.61 billion at the end of May
2008.[11]

[edit] Aftermath
A program of economic policy reform has since been put in place which has yielded very
satisfactory results so far. While a lot still remains on the unfinished reform agenda, the
prospects of macro stability and growth are indeed encouraging.