Lecure Slides For Session 10

INDIAN ECONOMIC AND
POLITICAL HISTORY II
IV The Economic Crisis of 1991
Economic Performance in the 80s
The economy performed better in the 80s

compared to the sixties and the seventies
GDP grew by 5.8 percent and industry by

6.5% percent on average per during the decade
This was in comparison to growth of 2.9%

between 1965 and 1979
However, like the fifties, higher growth was

largely the outcome of factors that were
unsustainable, especially in times of crisis
Source: Atul Kohli, Politics of Economic Growth in India, 1980-2005 Part I:

The 1980s, Economic & Political Weekly, April 1, 2006, pp.1254
Source: Atul Kohli, Politics of Economic Growth in India, 1980-2005 Part I:

The 1980s, Economic & Political Weekly, April 1, 2006, pp.1254
Exports did not grow significantly in the first half

of the 80s because industry was not yet
competitive
However, growth remained high because of

positive external factors which made increased
imports possible
The rapid increase in domestic oil production

because of new oil discoveries meant that outflow
of FE for oil imports was relatively less
There was also an increase in remittances from

expatriate workers
Concessional external funding, especially from the

World Bank and the IMF kept debt service
obligations down in the first half of the decade
In the second half of the decade though exports

increased it could not cover for increasing imports
and competitiveness remained a problem for
industry
Economic Strategy since 1985
Rajiv Gandhis economic strategy focused on three

aspects of reform
Encouraging capital imports to upgrade technology
Elimination of quantitative controls on import of
industrial machinery and cuts in tariffs

Modest industrial deregulation to increase

investment

reduction in number of industries subject to

licensing
Rationalization of tax system in order to increase

revenue
The Reasons for High Growth
Relaxation of controls in some sectors of

industry
Increased availability of funds for
consumption and investment because of
reductions in taxes
Increased availability of cheaper imported
inputs for domestic production
Private capital inflows and borrowing
abroad
Negative aspects of growth in the

80s
Large fiscal deficits
Poor competitiveness
Large current account deficits
Rapid rise in external debt
Large Fiscal Deficits
Reforms were carried out within the constraints of

a democratic environment
There was an emphasis on carrying out reforms

that directly and immediately benefited some
sections
The harder reforms that might have alienated

electoral constituencies, but could have resulted in
better quality growth, were put off
Reduction in taxation was popular, but there was

no emphasis on preventing tax evasion
Tax collection did not go up significantly
Revenue expenditure increased during the eighties

both because of a hike in salaries of government
employees and, later in the eighties because of
increase in subsidies and liberal grant of unsecured
loans
Competitiveness in Indian Industry
Competitiveness continued to be a problem

for Indian industry
Industry could nor respond as quickly as the

government expected to external competition
Private industry tried to get continued

protection arguing that the government was
liberalizing too quickly and tried to stall
liberalization measures
Labour reforms were not implemented and so even when

domestic industry tried to become competitive by downsizing
they found that labour regulations stood in their way
Though there was an emphasis on efficiency, there were no

moves to divest public sector units or to close down unviable
units
Investment increased in high-technology, liberalized sectors, but

not enough to increase competitiveness, or exports, significantly
Since reform was partial it did not result in

any significant increase in productivity or
competitiveness in Indian industry
This meant that exports did not rise
sufficiently to cover for increased outflow
of funds resulting from liberalization of
imports
Dealing with the CAD
Dealing with the current account deficit was

critical if import intensity was to continue
The shortfall was made up by two sources

of external funding

NRI Investments and Deposits

Commercial borrowing abroad
NRIs as sources of capital
The government liberalized investment rules

and allowed NRIs to invest in Indian capital
market, provided holdings did not exceed 3%
of shares in a firm
They were also given attractive returns on

bank deposits and assurance of repayment in a
convertible foreign currency
Deposits by NRIs in Indian banks increased as

returns were higher than investments abroad
Reasons for short-term

borrowing
NRI deposits were only one source of foreign

exchange
The second source was short-term

commercial borrowing abroad
Borrowing was necessitated by the fact that

exports did not rise to keep up with
increasing imports
The government had the option to go to the

IMF for funding
However, the liberalization measures were

unpopular within the Congress party and in
rural areas and the government was worried
about the political implications of going to
the IMF
A politically more feasible option was

short-term commercial borrowing abroad
which was available
However, the only loans commercially

available were short term loans
There was increased availability of loans

from international banks because of

Higher returns on loans to developing countries

The Latin American debt crisis and reduction in

lending to traditional borrowers
The banks, however, were concerned about

risks in lending
International banks were reluctant to give

medium-term or long-term loans and gave
only short term loans to developing
countries
Rapid rise in external debt
External debt doubled from US $ 35 billion

in 1984-85 to $ 69 billion in 1990-91
NRI deposits rose from $ 3 billion in 198485 to $10.5 billion in 1990-91
Short term external debt grew sharply to $ 6

billion
The increasing reliance on external shortterm debts made the country vulnerable to
external shocks
Immediate Causes of the Crisis
The Iraqi invasion of Kuwait in August 1990

and its financial impact
Political Instability
Downgrade by international credit-rating

agencies
Repayment of short term debt and the decline of

foreign reserves
The Impact of the Gulf War
The price of oil nearly doubled
Value of petroleum imports increased from

US $ 3.5 billion in 1989-90 to $ 5.7 billion in
1990-91
Workers remittances from the Gulf were

sharply reduced
There was a loss of some export markets in

the Gulf region
Fearing rupee depreciation import payments

were brought forward by firms and export
proceeds held abroad leading to negative
impact on foreign reserves
NRI inflows turned to outflows as NRIs,

fearing a moratorium on payments in
denominated currencies, withdrew deposits and
took funds out of the country
The Political Crisis
The Congress Party lost the election in November

1989 and though it emerged as the largest single
party, it refused to form a coalition government
The second largest party the Janata Dal formed a

non-Congress Government under V.P.Singh
The V.P.Singh government fell apart in December

1990 because of internal divisions within the party
and also within the coalition supporting it
A caretaker government was set up prior to

new elections in May 1991.
The political uncertainty was heightened by

the assassination of Rajiv Gandhi in May
1991
Lowering of credit ratings
Increased political uncertainty, along with the

negative effects of the Gulf War, led to a
downgrading by international credit rating agencies
Additional commercial borrowing abroad was not

possible
Low ratings also meant that many international

banks refused to roll-over short term debt and
demanded immediate repayment
The Crisis of 1991
By June 1991 official reserves fell to the

equivalent of just a few weeks imports
Inflation reached double digits
Lack of foreign exchange was starving

domestic industry of crucial imported inputs
Poor credit-rating meant that gold reserves had

to be transferred abroad as collateral for loans
The country was finally forced to go the

IMF for a stand-by loan in order to stabilize
the situation

Lecure Slides For Session 10

Uploaded by

Copyright:

Available Formats

Lecure Slides For Session 10

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Lecure Slides For Session 10

Uploaded by

Copyright:

Available Formats

INDIAN ECONOMIC AND

IV The Economic Crisis of 1991

Economic Performance in the 80s

The economy performed better in the 80s

GDP grew by 5.8 percent and industry by

This was in comparison to growth of 2.9%

However, like the fifties, higher growth was

Source: Atul Kohli, Politics of Economic Growth in India, 1980-2005 Part I:

Source: Atul Kohli, Politics of Economic Growth in India, 1980-2005 Part I:

Exports did not grow significantly in the first half

However, growth remained high because of

The rapid increase in domestic oil production

There was also an increase in remittances from

Concessional external funding, especially from the

In the second half of the decade though exports

Economic Strategy since 1985

Rajiv Gandhis economic strategy focused on three

Modest industrial deregulation to increase

reduction in number of industries subject to

Rationalization of tax system in order to increase

The Reasons for High Growth

Relaxation of controls in some sectors of

Negative aspects of growth in the

Large fiscal deficits

Large current account deficits

Rapid rise in external debt

Large Fiscal Deficits

Reforms were carried out within the constraints of

There was an emphasis on carrying out reforms

The harder reforms that might have alienated

Reduction in taxation was popular, but there was

Tax collection did not go up significantly

Revenue expenditure increased during the eighties

Competitiveness in Indian Industry

Competitiveness continued to be a problem

Industry could nor respond as quickly as the

Private industry tried to get continued

Labour reforms were not implemented and so even when

Though there was an emphasis on efficiency, there were no

Investment increased in high-technology, liberalized sectors, but

Since reform was partial it did not result in

Dealing with the CAD

Dealing with the current account deficit was

The shortfall was made up by two sources

NRI Investments and Deposits

Commercial borrowing abroad

NRIs as sources of capital

The government liberalized investment rules

They were also given attractive returns on

Deposits by NRIs in Indian banks increased as

Reasons for short-term

NRI deposits were only one source of foreign

The second source was short-term

Borrowing was necessitated by the fact that

The government had the option to go to the

However, the liberalization measures were

A politically more feasible option was

However, the only loans commercially