Question

which of the following was one of the main reasons for the balance of payment crisis in india before the economic reforms of 1991?​

Answer 1

Answer:

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Explanation:

The main causes behind the Balance of Payments crisis of 1990-91 were as follows: Break-up of the Soviet Bloc: Rupee trade (payment for trade was made in rupees) with the Soviet Bloc was an important element of India's total trade up to the 1980s.

Answer 2

Answer:

Due to unsustainable borrowing and exorbitant expenditure, India faced a Balance of Payments (BoP) crisis around the end of the 1980s. The 3.5% current account deficit in 1990-91 severely harmed the ability to finance deficits.

Explanation:

• The following are the main causes of the balance of payment crisis in India:

1. Breakup of Soviet Bloc
2. Iraq-Kuwait war
3. Slow growth of important trading partners
4. Political uncertainty and instability
5. Loss of investors' confidence
6. Fiscal indiscipline
7. Rise in non-oil imports
8. Rise in external debts.

• As a result, the balance of payments position in 1991 was on the verge of collapse, because current account deficits were mostly supported by borrowing from overseas.
• India was only weeks away from defaulting on its external balance of payment obligations, with foreign exchange reserves at USD 1.2 billion in January 1991 and a half depleted by June, hardly enough to cover around three weeks of crucial imports.
• India's initial response was to get a USD 2.2 billion emergency loan from the International Monetary Fund (IMF) by pledging 67 tonnes of gold reserves as collateral. To raise USD 600 million, the Reserve Bank of India had to airlift 47 tonnes of gold to the Bank of England and 20 tonnes of gold to the Union Bank of Switzerland.
• These actions temporarily alleviated the balance of payment crisis and kicked off P V Narasimha Rao's economic reform initiative.

Hence, India's economic position was catastrophic, and the government was on the verge of defaulting.

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