Which of the following was not immediate cause of 1991 economic crisis
Answers
Answer:
The 1991 Indian economic crisis had its roots in 1985 when India began having balance of payments problems as 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.[1] By the end of 1990 in the run-up to the Gulf War, the situation became so serious that the Indian foreign exchange reserves could barely finance three weeks’ worth of imports while the government came close to defaulting on its financial obligations. By July that year, the low reserves had led to a sharp depriciation of the rupee, which in turn exacerbated the twin deficit problem.[2] Chandrasekhar government could not pass the budget in February 1991 [3] at a crucial time when Moody had downgraded India and it further went down after the budget was not passed and global credit-rating agencies further downgraded India from investment grade making it impossible to even get short term loans and the government was in no position to give any commitment to reform the economy. The World Bank and IMF also stopped their assistance, leaving the government with no option except mortgaging the country's gold to avoid defaulting on payments.[4][5][6]
This led the Indian government to airlift national gold reserves as a pledge to a large conditional bail out from the International Monetary Fund (IMF) and World Bank in exchange for a loan to cover balance of payment debts.[7]
The crisis led to the liberalisation of the Indian economy, as one of the conditions stipulated in the World Bank loan (structural reform), requiring India to open itself up to participation from foreign entities in its industries, including state owned enterprises.[8]
Causes and consequences
The crisis was caused by currency devaluation;[2] the current account deficit, and investor confidence played significant role in the sharp exchange rate depreciation.[9][10][11]
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.[12] 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 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.[13]
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