explain the debt situation of india in 1991
Answers
Answer:
Due to lack of competitiveness of Indian products, India was not able to earn enough foreign exchange through exports to finance our imports. The current account deficit rose from 1.35% to 3.69% of GDP during 1980-81 to 1990-91. ... Consequently, the external debt increased from 12% to 23% of GDP during the same period.
Explanation:
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Answer: The 1991 Indian economic crisis was an economic crisis in India that resulted from poor economic policies and the resulting trade deficits. India's economic problems started worsening in 1985 as the imports swelled, leaving the country in a twin deficit: the Indian trade balance was in deficit at a time when the government was running on a large fiscal deficit. By the end of 1990, in the run-up to the Gulf War, the dire situation meant that the Indian foreign exchange reserves could have barely financed three weeks' worth of imports. Meanwhile, the government came close to defaulting on its own financial obligations. By July that year, the low reserves had led to a sharp depreciation of the rupee, which in turn exacerbated the twin deficit problem. The Chandrasekhar government could not pass the budget in February 1991 after Moody downgraded India's bond ratings. The ratings further deteriorated due to the unsuccessful passage of the fiscal budget. This made it impossible for the country to seek short term loans and exacerbated the existing economic crisis. The World Bank and IMF also stopped their assistance, leaving the government with no option except to mortgage the country's gold to avoid defaulting on payments.
In an attempt to seek an economic bailout from the IMF, the Indian government airlifted its national gold reserves.
The crisis, in turn, paved the way for the liberalisation of the Indian economy, since one of the conditions stipulated in the World Bank loan (structural reform), required India to open itself up to participation from foreign entities in its industries, including its state owned enterprises.
Causes and consequences
The crisis was caused by currency overvaluation; the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.
The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-eighties, India started having the 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. Large fiscal deficits, over time, had a spillover effect on the trade deficit culminating in an external payments crisis. By the end of the 1980s, India was in serious economic trouble.
The gross fiscal deficit of the government (centre and states) rose from 9.0 percent of Gross Domestic Product (GDP) in 1980-81 to 10.4 percent in 1985-86 and to 12.7 percent in 1990-91. For the centre 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.
In mid-1991, India's exchange rate was subjected to a severe adjustment. This event began with a slide in the value of the Indian rupee leading up to mid-1991. The authorities at the Reserve Bank of India took partial action, defending the currency by expanding international reserves and slowing the decline in value. However, in mid-1991, with foreign reserves nearly depleted, the Indian government permitted a sharp devaluation that took place in two steps within three days (1 July and 3 July 1991) against major currencies.
With India’s foreign exchange reserves at $1.2 billion in January 1991and depleted by half by June, barely enough to last for roughly 3 weeks of essential imports, India was only weeks away from defaulting on its external balance of payment obligations.
Government of India's immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral security.The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million. The van transporting the gold to the airport broke down en route due to tyre burst and panic followed . The airlift was done with secrecy as it was done in the midst of the 1991 Indian General elections.National sentiments were outraged and there was public outcry when it was learned that the government had pledged the country's entire gold reserves against the loan. A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber. The Chandra Shekhar government had collapsed a few months after having authorised the airlift. The move helped tide over the balance of payment crisis and kick-started P.V. Narasimha Rao's economic reform process.