INDIA'S 1991 CRISIS

2. India's Balance of Payments Stress

• In the late 1990s, India grappled with a severe balance of payments stress.
• This challenging situation was triggered by a combination of factors, including a slowdown in inward remittances and a surge in oil prices following Saddam Hussain's invasion of Kuwait.
• The current account of India's balance of payments faced a double whammy - a reduction in receipts and an increase in the value of imports.
• By the fiscal year 1990-91, the current account deficit had swollen to 3% of the GDP, reaching its highest level in two decades.
• Speculations arose about the possibility of India defaulting on its external payment obligations.
• In this critical moment, the Reserve Bank of India (RBI), under the leadership of Mr Venkitaramanan, played a pivotal role in addressing the crisis.
• The RBI's proactive measures included pledging the country's gold to international banks in exchange for a hard currency loan.
• The RBI's history details key initiatives taken during this period. In April 1991, the Indian government raised $200.0 million from the Union Bank of Switzerland through the sale (with a repurchase option) of 20 tonnes of gold confiscated from smugglers.
• Subsequently, in July 1991, India shipped 47 tonnes of gold to the Bank of England, raising an additional $405.0 million.

3. Economic Management and Public Perception

• While the act of pledging the country's gold was met with mockery by some in India, it was, in fact, a demonstration of economic courage and strategic management.
• Importantly, it helped India repay its international donors and creditors, though it was not a complete resolution of the crisis.
• India's heavy dependence on oil imports (constituting around 80 per cent of its total oil consumption) underscored the practical value of the RBI's decision.
• Avoiding default safeguarded India's access to global loan markets, which is crucial for financing imports, especially in the face of potential future shortfalls in export earnings.

4. RBI's Strategic Measures and Import Compression

• Before seeking international loans, the Reserve Bank of India (RBI) initiated a program of economic reforms, particularly focusing on import compression.
• This strategy, primarily implemented by raising the cash margin on imports, gained significant momentum during the tenure of Governor Mr Venkitaramanan.
• Under Mr Venkitaramanan's leadership, the cash margin increased four-fold between October 1990 and April 1991.
• Supplementary measures that added to the cost of imports were also implemented. Together, these efforts constituted a stringent approach to curbing imports. This strategy proved successful, leading to a remarkable turnaround in the current account deficit.
• The impact was evident as the current account deficit peaked at 3 per cent of the GDP in 1990-91, and drastically decreased to a mere 0.3 per cent in 1991-92. This significant improvement almost eliminated the need to secure foreign exchange for financing India's non-debt payments.
• While the government led by Narasimha Rao took office in mid-1991 and implemented measures, including the devaluation of the rupee, to address the long-term balance of payments issues, the immediate improvement in the balance of payments is attributed to the import compression measures implemented by the RBI.
• The data indicates that exports did not rise significantly despite a substantial contraction in imports in 1991-92.
• According to the RBI's official history of the period, "At a critical time and in the thick of the BoP crisis, the main task of the Reserve Bank under the leadership of the Governor, Shri S. Venkitaramanan, turned out to navigate the country through the troubled waters." The crisis was declared "successfully resolved" at that time.
• Although the immediate crisis was resolved, the subsequent economic reforms led by Dr Manmohan Singh and his team garnered more public attention.
• The architects of the crisis management efforts, including Governor Venkitaramanan, were somewhat forgotten in the public sphere.
• The end of Governor Venkitaramanan's term was marred by issues related to the unexpected breakout of irregularities in securities transactions from April 1992, known to the public as "the Harshad Mehta scam."

5. LPG Reforms

The 1991 LPG (Liberalization, Privatization, Globalization) reforms in India were a set of economic policies implemented to transform the country's socialist economy into a more market-oriented and globally integrated one. These reforms were introduced against the backdrop of a severe balance of payments crisis and the need for structural adjustments to boost economic growth.

Key Aspects of the 1991 LPG Reforms

Liberalization

• Industrial De-Licensing: The government reduced restrictions on private sector participation by delicensing a significant number of industries. This move aimed to encourage competition and efficiency.
• Trade Liberalization: Import restrictions were eased, and tariffs were reduced to promote international trade. This helped in exposing domestic industries to global competition and improving efficiency.
• Financial Sector Reforms: The financial sector underwent significant changes, including the reduction of interest rate controls and the introduction of market-driven interest rates. This led to increased competition among banks and financial institutions.

Privatization

• Disinvestment: The government initiated the process of selling minority stakes in public-sector enterprises (PSUs) to private investors. This was aimed at improving the efficiency and performance of PSUs.
• Encouraging Private Sector: The private sector was encouraged to participate in sectors that were previously reserved for the public sector. This included industries like telecommunications, power, and infrastructure.

Globalization

• Foreign Direct Investment (FDI): Restrictions on FDI were eased, allowing foreign companies to invest in various sectors of the Indian economy. This facilitated the inflow of foreign capital and technology.
• Integration with Global Economy: India actively engaged with the global economy, participating in international trade agreements and opening up its markets to foreign competition.

Other Reforms

• Fiscal Reforms: Measures were taken to rationalize tax structures and reduce fiscal deficits. This included the introduction of the Goods and Services Tax (GST) much later, in 2017.
• Structural Adjustments: The reforms aimed at addressing structural inefficiencies in various sectors, promoting a more competitive and market-driven economy.

• In recounting the experiences of interacting with Mr. Venkitaramanan, a sense of remarkable openness is highlighted. This openness was demonstrated when, in the middle of 1991, the received a letter from Mr Venkitaramanan expressing interest in an article related to the conduct of monetary policy.
• Despite the author's relative professional obscurity and the critical nature of the article, Mr Venkitaramanan extended an invitation for a personal meeting.
• In September of the same year, over 20 economists were invited to meet with Mr. Venkitaramanan. This gathering represented a diverse spectrum of opinions on the Indian economy, covering various perspectives.
• What stood out was Mr. Venkitaramanan's impressive engagement, responding to each presentation made during the meeting.
• Reports suggest that during negotiations with the International Monetary Fund (IMF), Mr Venkitaramanan would adeptly counter arguments by referring to research produced by Indian economists.
• This approach likely stemmed from a belief in the importance of relying on a country's intellectual resources. Notably, he took steps to establish the Development Research Group within the RBI.
• The Development Research Group aimed to facilitate professional interaction between the RBI's staff and external stakeholders, particularly independent economists.
• While the full success of this initiative may be debated, its intention was clear to integrate diverse perspectives into the functioning of India's central bank.
• The RBI's struggle to control inflation might reflect a shift towards adhering to the prevailing economic orthodoxy rather than a deep understanding of India's unique economic dynamics.

7. The Way Forward

India's 1991 crisis was a defining moment in the country's economic history. While the immediate crisis was overcome through a combination of bold policy actions and external support, it was the subsequent economic reforms that truly transformed India's economic landscape. The lessons learned from this experience continue to be relevant today, as India strives to navigate the challenges of the 21st century.