What Caused the Economic Crisis in India in 1991?

The economic crisis in India in 1991, known as the Great Recession of 1991, was one of the worst economic crises to hit India after the independence. The crisis took place due to structural imbalances and vulnerabilities which emerged in late 1980s and continued to persist throughout 1990-91. It was triggered by the balance of payments problem, fiscal imbalances and high inflation leading to the depreciation of the Indian rupee.

The Cause

The main cause of the economic crisis in India in 1991 was a severe balance of payments crisis. This was caused by a number of factors, including: high oil prices (due to the Gulf War), high levels of external debt, low foreign exchange reserves, and large fiscal and current account deficits. The government responded to the crisis by devaluing the rupee, implementing austerity measures, and borrowing from the International Monetary Fund (IMF). However, these measures did not solve the underlying problems and led to further economic decline. In addition, corruption within the government increased because officials took advantage of their positions for personal gain. Furthermore, poor infrastructure and other impediments continued to contribute to slow growth in various sectors of the economy such as agriculture and industry. Moreover, unemployment rose at alarming rates with no signs of improvement on the horizon due to slow industrial production. Finally, inflation reached an all-time high with no end in sight due to price controls which restricted food supplies leading up to elections which were scheduled for April 1992. These price controls came about when President Ramaswamy tried to protect the middle class during his campaign against Congress leader P.V. Narasimha Rao who had proposed lowering import tariffs and interest rates to help reduce inflation. After being elected in June 1991, President Ramaswamy tightened control over imports and cracked down on black marketeering but this only served to exacerbate the situation because it worsened shortages while driving up prices even higher. The result was that businesses could not afford goods or raw materials while the public suffered tremendously due to unaffordable goods.

How did it happen

It all started with a balance of payments crisis. India had been living beyond its means, importing more than it was exporting and borrowing heavily to finance the deficit. In 1990, foreign investors began to get nervous about all the debt and started pulling their money out of India. This led to a decrease in the value of the rupee, which made imported goods more expensive and put more pressure on the already strained economy. The government tried to stop the outflow of money by imposing strict controls on currency exchange, but this only made things worse. Businesses couldn’t get the hard currency they needed to buy raw materials and pay their employees, and people began hoarding food and other essentials. Desperate for cash, the government raised taxes and slashed public spending. But these moves worsened the situation, driving investment away from an already shrinking economy and making unemployment much worse. 

As businesses went under and people lost their jobs, there were fewer consumers left to drive demand for products-and imports became even more expensive as supply decreased. At that point, panic set in: The Indian rupee sank like a stone; inflation skyrocketed; prices soared while wages stayed stagnant or declined; poverty levels reached unprecedented heights; confidence among citizens dwindled-and riots broke out across the country as discontent turned into anger.

The Effects

The crisis was caused by a number of factors, including a large fiscal deficit, high interest rates, and a widening current account deficit. These factors led to a loss of confidence in the Indian economy, and investors began to pull their money out of the country. This caused the value of the rupee to plummet, and inflation to skyrocket. The crisis led to widespread poverty and unemployment, and was a major blow to the Indian economy. In response, then-Prime Minister Narasimha Rao initiated economic reforms that liberalized India’s economy. The country abandoned its import substitution strategy, and opened up its markets to foreign trade and investment. It allowed private enterprise into industries that had previously been reserved for state-owned companies. Reforms were accompanied by measures designed to protect workers and farmers, such as increased spending on social services like education and healthcare, as well as land reform laws intended to increase the amount of land under cultivation while distributing ownership more equally among rural landowners.

Where did we go wrong

The Indian economy was doing well in the 1980s. But, by the early 1990s, things had started to go wrong. The government had been borrowing money to finance its deficit, and this had led to high inflation. In addition, India had started to import more than it was exporting. This led to a balance of payments crisis, and in 1991 the government was forced to devalue the rupee. This caused a panic, and people started withdrawing their savings from banks. As a result, many banks collapsed. The crisis deepened, and eventually the government had to ask for help from the International Monetary Fund (IMF). The IMF imposed strict conditions on how the economy should be run. For example, interest rates were increased to control inflation. Further down the line, economic reforms were introduced which helped increase trade with other countries and improve our exports. Gradually, over time, the Indian economy recovered. By 2000 we were back to growth rates of 7%.

How this time is different

The current economic crisis in India is different from the one that occurred in 1991 for a number of reasons. First, the country’s GDP has grown significantly since 1991, meaning that it is now much better equipped to weather an economic downturn. Second, the Indian government has taken steps to liberalize its economy since 1991, which has made it more resilient to external shocks. Finally, there is now a greater degree of global economic integration, which means that India is less likely to be isolated from the world economy during a crisis.

Lessons learnt

The crisis was caused by a number of factors, including high government spending, low tax revenue, a large trade deficit, and high interest rates. The government responded by enacting austerity measures, such as reducing spending and increasing taxes. These measures helped to stabilize the economy and set it on the path to recovery. However, they also led to social unrest and political instability. The crisis taught several lessons, including the importance of fiscal discipline, the need for structural reforms, and the dangers of political interference in economic policy. Austerity measures, such as reduced spending and increased taxes, are sometimes necessary when faced with an economic crisis. But these may lead to public discontent which can have significant political implications.