The Economic recession of 1991
By: Disha Nigam
“Is the economic situation that bad?"
“No sir it's worse."
This conversation between the newly elected Prime Minister P.V Narasimha Rao and the Cabinet minister sums up the entire situation of India in 1991. With the ever-degrading value of money, the assassination of the upfront leader of the INC and the then Prime Minister Rajiv Gandhi, 1991 indeed became a year of turmoil that had shook the political and economical spine of the country.
On May 24, the explosion at Tamil Nadu, killing 12 people along with the prime minister had left the country and the INC in distress. The economic condition had already been on a downfall with the deficit in the balance of payment and the foreign reserves not even enough to incur the import expenses of more than 3 weeks. 23% of our GDP owed to the external debt while 55% had been the internal debt.
The economic crisis, however, was not a result of a sudden upheaval but the repercussion of a long drawn out process. Newly independent India with its urge to protect the domestic farmers and small industries was under the license raj system. Under this, industries required a license / permission from the government to open/ close their enterprises or even upscale the level of the production. This system caused a shift in the focus of producers from product enhancement to the flattery practices for the ministry. The providential promotion, expenditure on defence and the negligence towards social issues like poverty, unemployment and population explosion pushed the country deeper into the spiral of economic recession. What made the situation more precarious was the complete failure of the government to improve the export policies. Another backdrop to the entire situation was the failure of the government to reduce profligate spending even though the per capita income had stooped down to its lowest numbers.
Adding to the internal problems, the Soviet Union, which had been one of the major exporters for the country had collapsed. Thus, there had been a decline in the exports and hence a deficit in the BOP.( Balance of Payment) The factors contributing to the crisis also date back to 1990s as the misadventure of Saddam Hussain to Kuwait led to a war between US and Iraq. Hence, the 1990s shock of oil price from the gulf war played a vital role in the crisis the country faced the following year. India in every aspect was on the brink of collapse. The agricultural sector showed a mere growth of 4.4% whereas industrial and service sector showed 6.8 and 6.6 percent respectively.
What started as a mere deficit led to some huge changes in the country economically. It faced challenges it was not ready for. The Indian economy was in ventilator and a loan from the International Monetary Fund seemed like the only breath it could take. We had now reached a pivotal point. However, with the financial aid of $7 billion came certain conditions, which involved the upliftment of the trade restrictions and withdrawal of the government’s control.
The Path To LPG
The road to a liberalized trade and economy was no less thrilling. The government had to devalue the rupee in order to regain its exports strength but since the crisis was so severe, it was done in two rounds; 9% on the 1st of July and around 11% on the 3rd.
Amidst the economical setback, the fear of diminishing gold reserves of the country was an additional pressure. India had to transport 47 tons of gold to the Bank of England to borrow about 400 million dollars, which could save the country from the economical incarceration.
However, the actual journey to keep the sail of our economy stable during the storm of crisis started on July 4, 1991. The announcement of the New Trade Policy by P. Chidambaram changed the entire scenario. The aim was to make India self-reliant and increase the efficiency of the national market. This policy focused on export promotion, removal of the quantitative restrictions and reduction in tariff rates followed by rationalization in the tariff structure and the much-needed foreign reforms.
Another dimension of the scenario was the tabling of New Industrial Policy on July 24, the LPG (liberalization, privatization, globalization) model. This resulted in the increase of international competition in the local market.
So, what was going to happen now? What would the fate of the small producers be? We were yet to know. The same day, Dr Manmohan Singh, the then finance minister also presented the Union Budget that focused on the needed fiscal adjustments. Equal emphasis was laid on the protection of poor from the burden of the adjustment.
We were now heading towards a brighter future. The $ 7 billion dollar loan was not just about the LPG policies but also to keep the economy afloat. The loan and the reforms helped India regain its stability. They protected it from the foreign and economic dominance that it might have faced, had the measures were not being taken.
A Brighter Future?
The economic crisis of the country was a gamble. The dice of LPG and several loans rolled by the authorities gave the numbers in our favour. However, we cannot ignore the fact that the warnings about the crisis the government received in advance repeatedly went unheard and that had put India in a situation like that in the first place. Moreover, after analysing the present a parallelism between the era of 1990s and 2020, it can be drawn that the focus of the government still remains on defence. The warnings haven’t changed, the challenges haven’t changed and so won’t the crisis. But one question remains the same. Is India ready to face one such a crisis again?
RBI India ( GDP stats)
The Indian Express