1991 forex crisis india

The global oil shock may have triggered the balance of payments crisis, but years of short-sighted policy led up to it. Before , all major post-Independence economic crises in India were caused by exogenous forces—the contribution of policy errors towards their exacerbation notwithstanding—whether by war or drought or global commodity shocks. Not the crisis.

It did not develop overnight.

It was caused by more than a decade of imprudence. The budget was a turning point from the relative conservatism of previous fiscal management. Over the next decade, the twin—current and fiscal—deficits widened continuously.

Here I examine the long road to the economic disaster that shook India in Fiscal policy was already pretty loose going into the summer of , when India suffered the worst drought since Independence and the global oil shock caused by the Islamic Revolution in Iran. The former refers to the self-awakening and political assertion of hitherto silent groups such as farmers, who formed the backbone of many parties in the Janata coalition.

The latter refers to a decline in the capacity of political institutions in addressing those demands legitimately or satisfactorily. Reliance on short-term populist measures, mostly in the form of government largess, followed from this decay.

This period saw a rise in foodgrain procurement prices without any increase in issue price and tax deduction on agriculture inputs. Fertilizer subsidies increased tenfold from Rs60 crore to Rs crore during the Janata government Food and export subsidies grew rapidly as well.

A greater interest payment burden due to a combination of wider primary deficit fiscal deficit excluding interest payments and higher cost of borrowing, strong growth in public sector employment and wages, bailout of loss-making public sector firms and slower growth in government revenue made the situation worse.

The only mitigating factor was a scaling back of public investment—partly out of budgetary constraints and partly out of policy paralysis. Meanwhile, gradual import liberalization from onwards had quite expectedly manifested itself in the rapid growth of imports, especially that of intermediate and capital goods.

Unfortunately, export growth failed to keep up. International aid and loans started drying up after as well. On the flip side, this unsterilized reserve accumulation reflected in an increase in total money supply dollar inflows were accumulated by the central bank, while it paid out rupees in exchange.

The severe drought and the global oil shock of came in this backdrop of fiscal irresponsibility, rapid monetary expansion and political instability the Janata government had split and was on its way out by then. Disturbances in Assam curtailed the domestic oil supply as well. Inflation, already starting to react to pent-up money growth, accelerated—the wholesale price index reached high teens.

Fortunately, lessons from previous crises had been learnt, and even though food prices rose, the government had accumulated enough foodgrain reserves to avoid a severe food crisis. Alongside, prudent accumulation of foreign exchange reserves over the preceding years allowed the government to avoid import suppression.

Nevertheless, the situation was grim, with fuel shortages leading to a power and transport crunch. Historical deficiencies in infrastructure began to bite harder. An industrial recession followed. To help finance this package, the government was forced to approach the International Monetary Fund in Later that year, India and the IMF started negotiations for a larger loan—to the tune of a billion dollars—to pre-empt the funding needs of the sixth Five-Year Plan. Rather than advocating fiscal restraint as usual, the IMF helped finance the successful development of the Oil and Natural Gas Commission, or ONGC.

Apart from raising indirect taxes, administered prices for several commodities were raised.

Once a deal with the IMF had been negotiated and the crisis deal with, the finance ministry was back on its journey to financial ruin in The fiscal deficit of the consolidated government, which had averaged 4. Deviating from the Janata years, there was now a welcome focus on public investment under Indira Gandhi Had it not been for the new-found profitability of the revived state-owned oil enterprises, public sector saving would have declined rather than just stagnating.

During the Rajiv Gandhi years, there was some uptick in revenue, but due to higher projectionist tariffs, rather than the official story of a Laffer curve-like effect —total tax collection supposedly increases with a cut in tax rates as people are incentivized to work more—in the wake of income and corporate tax cuts.

The deficit was financed by a combination of external borrowings from the IMF, the World Bank and commercial sources, as well as the crowding out of the private sector—higher bank reserve requirements to forcibly accommodate government borrowing needs reduced credit availability for the private sector—and deficit monetization essentially money printing by the RBI.

Public sector enterprises were allowed to raise bank loans abroad. High domestic interest rates compared to the global financial markets made this a particularly attractive option. Expansionary fiscal policies and a desire to attract NRI deposits had kept domestic interest rates high. Global lenders, reeling from a series defaults in Latin America during the late s to the early s the so-called LDC crisis , were looking for solvent creditworthy borrowers and India stood out.

In the course of my interviews with bureaucrats of that era, I even came across speculations that Indian public sector managers may have received kickbacks from foreign lenders—particularly Japanese investors flush with cash—to make them take on more foreign debt.

However, external commercial or non-concessional borrowing, as the name suggests, was costlier. A modest pre-crisis current account surplus that was turned into a deficit in remained so and continued to deteriorate throughout the s, peaking at 3. Using current account deficit as a percentage of exports rather than GDP, a more suitable metric for India given the meagre foreign earnings, the situation looked even starker.

Almost half of these liabilities were owed by the public sector. There has been a debate over how much did the liberalization of the trade and industry regime—rather than just the fiscal deficit—contributed towards the balance of payment crisis by facilitating a surge in imports. An argument blaming liberalization finds resonance especially among those who are on the left of the political-ideological spectrum, and also among Congress apologists. However, a closer look at the data suggests that the import intensity of domestic production hardly changed during the decade.

The nature of import liberalization was such that it only made the processes less cumbersome, and imports were still mostly confined to essentials. Therefore, the root of the balance of payment crisis lay in, first, the investment-savings deficit driven by fiscal profligacy; second, the reliance on non-concessional external borrowing to fund that deficit; and finally, the inability of export growth to keep pace with the growth in imports—i.

The development of domestic oil supplies in the aftermath of the crisis was a definite positive for the balance of payments. Some of the latter was also down to consumption suppression and the decline in global oil prices. Nevertheless, the export performance in the first half of the s was bad enough for the current account to remain in deficit.

While the global economy had been hit by a demand shock, Indian export performance was much worse than its peers. Real appreciation of the rupee was an import factor behind this, which in turn was caused by high inflation and institutional unwillingness to adjust the nominal exchange rate accordingly the currency should ideally depreciate to compensate for domestic inflation to keep it competitive globally. However, it was insufficient to keep up with import expenses.

On top of that, the growing—and costlier—external debt manifested itself in higher interest payments.

Does the Indian economy have a crisis feel? - The Economic Times

In its official institutional history , the central bank takes great pains to highlight the instances when respective RBI governors issued polite warnings to the government. Manmohan Singh governor for and R. N Malhotra from time to time raised concerns over the rapid growth in monetary base due to government spending, the resultant threat to price stability, rising external deficits and the crowding out of credit to the private sector.

These warnings fell on deaf ears as the finance ministry emphasized the urgent developmental and defence needs of the country.

Budget speeches for most of those years do not betray any sense of worry or concern over the rising imbalances. In the budget speech delivered in early , V. India again had a full-time finance minister in the form of N. Tiwari by the next budget. The budget, presented by yet another new face, Shankarrao Chavan, did express concerns over the fiscal and current account deficits and external debt Shankarrao Chavan.

However, as the budget pointed out, little was done to remedy the situation and as with previous budgets there was significant spending overruns. A new government was in place by and the debt-servicing situation was becoming too difficult for the government to ignore. However, the budget was not tough enough to stave off the crisis.

In fact it announced a slew of debt reliefs for farmers, artisans and weavers, which only added to the liabilities of the government. This begs the question, were bureaucrats in the economic ministries and cabinet ministers asleep at the wheel? They were certainly not unaware of the issue. Apart from the RBI, the IMF had also been raising concerns over the lack of fiscal adjustment from at least the middle of the s. However since the government was not borrowing any longer from the IMF, the government ignored those admonishments without consequence.

But warnings from the outside notwithstanding, the government itself had issued a white paper in that raised concerns over fiscal stability. The annual Economic Survey, prepared by a team at the ministry of finance, also repeatedly issued warnings during the decade.

The fact that by the time Manmohan Singh rose to present the budget in the summer of he was the seventh finance minister in six years did not help matters. But preserving institutional memory is one of the key reasons for having a professional bureaucracy, and therefore, the finance ministry cannot escape blame.

REPORT ON ‘THE ECONOMIC CRISIS OF INDIA- ”

The government, perhaps, be could be been forgiven if one focused exclusively—and erroneously—on inflation to look for signs of fiscal excess. Climbing down from the highs of the crisis, wholesale price inflation remained relatively subdued for the decade.

The government, therefore, presumed that it had fiscal space. However, price rise had been kept in check by savage monetary measures that made credit inaccessible for everyone except the government and by keeping administered prices low—almost a third of the components of the wholesale price index basket were either fully administered, partially administered or subjected to different forms of voluntary and other mechanisms.

As would be expected, the result was undersupply and rationing of goods. All the government had to do was to look at the debt figures. With every conceivable agency having sounded the klaxon, continuing on the same path was nothing short of callous.

Patel, RBI governor from to , describing the official reaction in a famous speech http: Rather than take any remedial action, we went merrily along, borrowing more and more at home and on shorter and shorter terms abroad.

The climate for official and concessional capital had turned irretrievably adverse for many years. But our response to that was not to strive harder for self-reliance but to increase the amount as well as the proportion of short-term debt in our total external indebted. Vijay Joshi and I. As long as growth was high and foreign creditors were willing to finance the deficit, no one was concerned about sustainability. In public imagination, it was the global oil shock during the First Gulf War that caused the balance of payment crisis.

But that was merely the trigger. By the end of s, India was a child playing with matchsticks in a firecracker factory. Ankit Mital is an economist and a lapsed academic. He is currently writing a book on the economic crisis and liberalization.

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From left Indira Ganhi, Morarji Desai and Rajiv Gandhi.

Economic Crisis Forcing Once Self-Reliant India to Seek Aid - kysiqubonypun.web.fc2.com

Photographs by Hindustan Times. The crisis Fiscal policy was already pretty loose going into the summer of , when India suffered the worst drought since Independence and the global oil shock caused by the Islamic Revolution in Iran. Public finances in the s Once a deal with the IMF had been negotiated and the crisis deal with, the finance ministry was back on its journey to financial ruin in What were the factors that led to this?

All of this would spill over into the balance of payments. Balance of payments in the s A modest pre-crisis current account surplus that was turned into a deficit in remained so and continued to deteriorate throughout the s, peaking at 3. Home Companies Opinion Industry Politics. Consumer Lounge Multimedia Money Science. Education Sports Specials Technology Mint on Sunday. Contact Us About Us Advertising Sitemap Subscribe. Mint Apps Shine Hindustantimes Syndication DesiMartini.

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