1991 Financial Crisis: The Wounds Are Yet To Heal

Vinayak Gaur, IIM Rohtak

Introduction

The 1991 Indian Financial Crisis represented a turning point in the history of the Indian economy. By the middle of 1991, India's foreign exchange reserves had fallen to critical levels, which could barely fund two weeks of vital imports. The prospect of default on international obligations was real, and India was about to be insolvent for the first time since independence. The crisis was not a freak accident but the end of a long chain of inconsistencies, growing fiscal imbalances, dependence on external borrowing, and structural deficiencies over the last decade. The government spending over the 1980s was high, financed partly through the accumulation of domestic and external debt, while India's exports, constrained by an inward-looking industrial policy, continued to perform poorly. The outbreak of the Gulf War in 1990 exposed the weak structure of the economy by increasing oil prices and diminishing remittances from Indian workers in the Middle East.

The 1991 crisis not only shook India's economic foundations but also gave radical reformers the opportunity to reshuffle India's economy in ways which ultimately changed its course forever. The reform from a heavily controlled economy to a liberalized market economy took on speed.