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Causes for Indian crisis 1991

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Mohnish Waikar

on 6 December 2012

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Transcript of Causes for Indian crisis 1991

Causes for Indian crisis 1991 1990-91 Foreign Exchange Crisis Conclusion 1990-91 Foreign Exchange Crisis
"When the new Government assumed office (June 1991) we inherited an economy on the verge of collapse. Inflation was accelerating rapidly. The balance of payments was in serious trouble. The foreign exchange reserves were barely enough for two weeks of imports. Foreign commercial banks had stopped lending to India. Non-resident Indians were withdrawing their deposits. Shortages of foreign exchange had forced a massive import squeeze, which had halted the rapid industrial growth of earlier years and had produced negative growth rates from May 1991 onwards". Major Characteristics of
the crisis situation in 1991-92 There was a serious fiscal crisis in which fiscal deficit reached the level of 6.6% of GDP

Internal debts rose to about 50% of GDP with interest payments draining about 39% of total revenue collections of central government.

GNP growth rate fell to 1.4% from the peak level of 10.5% in 1988-99 Government expenditure >Government revenue Causes Excessive Government borrowings

First half of the 1980s : export growth was slow, the trade deficit was kept in check.

Second half of the 1980s Export growth was rapid: measures of deregulation and improved competitiveness associated with the real depreciation of the rupee.

However, the value of imports increased at a faster clip

External debt (or foreign debt) is that part of the total debt in a country that is owed to creditors outside the country. The debtors can be the government, corporations or private households.
Trends in External debt need to be reviewed along with the:
•developments in external sector
•capital flows
•the overall trade regime involving trade restrictions
•export subsidization and exchange controls
•and the overall macroeconomic policies
All these to a large extent govern the behavior of external debt and its sustainability. External Debt External Debt Development Until 1970s
• External capital played a very insignificant role in India’s development process.
• Domestic policy tended towards protectionism, with a strong emphasis on import substitution industrialization, a large public sector and central planning. Developments Leading to 1990 Foreign Exchange
•Liberalization of the import control regime since mid-80s, by raising commercial loans/bonds from the euro currency markets.
• Growth in imports.
•Stagnant flows in invisibles such as tourism and private transfers. External debt at $ 83 billion in March 1991, 45 % of which was contracted from private creditors and at variable interest rates.
Debt service ratio reached 30 percent ( Indonesia 31%, Mexico 28 %, and Turkey 28%).
Interest components alone was 50 per cent of the total current account deficits and 21 per cent of the total merchandise exports
Foreign exchange reserves fell to less than $1bn 1991 Foreign Exchange Crisis Negative growth rates

i.Agricultural promotion : -2.8%
ii.Food Grain production : -5.3%
iii.Industrial production : -0.1%
Inflation Rate based both on WPI and CPI soared high at 13-14% Foreign trade shrunk imports falling by 19.4%
& exports by 1.5%

Rupee depreciated by 26.7% vis-a vis US dollars.

Fall in foreign exchange reserve

Confidence of international financial institutions
was badly shaken. National Front coalition faced a nationwide crisis
A campaign by the BJP to build a Hindu temple at the site
of a mosque in Ayodhya resulted in widespread communal violence

Government collapsed when the BJP pulled out

New minority government failed to pass the scheduled budget in February 1991

In May 1991, while campaigning for the general elections, former prime minister Rajiv Gandhi was assassinated. Political Instability What is Fiscal Crisis ?
Burden of non-development expenditure caused deterioration in the fiscal situation of India
The main indicators of fiscal crisis are various deficits such as :-
Revenue Deficit (RD)
Budgetary Deficit (BD)
Fiscal Deficit (FD)
Primary Deficit (PD) Indicators of Fiscal Crisis Defence Expenditure

- The government has limited scope to reduce defence budget due to security problems across the Indian borders.

- The defence expenditure on the part of central government has increased from Rs. 10,874 crores in 1990-91 to Rs. 51,542 crores in 2006-07.

The growing current account deficits increasingly financed by borrowing on commercial terms and remittances of nonresident workers.
India’s external debt nearly doubled from some $35 billion at the end of 1984/85 to $69 billion by the end of 1990/91.

Medium- and long-term commercial debt jumped from $3 billion at the end of 1984/85 to $13 billion at the end of 1990/91.

The stock of nonresident deposits rose from $3 billion to $10.5 billion over the same period.

Short-term external debt grew sharply to $6 billion and the ratio of debt-service payments to current receipts widened close to 30 percent.
BY THE END OF 1990/91
Excessive Government borrowings

Tax Evasion

Weak Revenue Mobilisation

Huge Borrowings

loss of investor confidence

India’s credit rating : Downgraded

Increase in Subsidies

Payment of Interest
India -- just an inch away from defaulting on its loans had less than $2 billion in forex reserves in January 1991

The caretaker government of India headed by prime minister chandra shekahr's, immediate response was to secure an emergency loan of $2.2 billion

1. International monetary fund= 67 tons of India's gold reserves
2. Bank of England =47 tons of gold
3. Union bank of Switzerland= 20 tons of gold

Fast forward to 2009.
India bought 200 metric tons of gold from IMF for $6.7 billion. 

Now, India's forex reserves are inching towards $300 billion.
RBI governor D Subbarao made a presentation while speaking at an event organized by Indian Merchants Chamber in Mumbai recently. A slide in his presentation gives an insight on the difference between the economic crisis India faces now and the one the country faced in 1991.
Is 2012 going to be a repeat of 1991?
In 1991, an implosion was imminent. In 2012, an implosion is not imminent. Why?
Is 1991 set to haunt India’s currency once again? 1991 scenario
- High Inflation Rate
- 25% Devaluated Rupee (How it helped in reform)
- Rise in Current Account Deficit
- Rise in Fiscal Deficit
- Moderating Growth

If one observes the macroeconomic fundamentals, things are not too different from what they were 20 years back.

Current economic problems
Thank You by,

Gaurisha singh 2012040
Kanika Bhatia 2012148
Kriti lffmfml 2012054
Margaret Lawrence 2012160
Mohnish Waikar 2012168
Jigar Naik 2012176
Full transcript