What was 1991 Indian Economic Crisis?

The Indian economy today is about 3 trillion dollars. It is the 6th largest economy in terms of nominal GDP and in terms of purchasing power parity it stands in 3rd rank worldwide. But during 1991 Indian Economic Crisis, India was on the verge of bankruptcy. The year of 1991 was a disaster for the Indian economy.

During 1991 Indian Economic Crisis, India was in the worst condition as its foreign exchange reserves could finance only 2 weeks worth of imports.

 

The Reasons Responsible for 1991 Indian Economic Crisis:

• India was largely dependent on Gulf countries for oil as oil production in India was very low. The Gulf war in 1990 increased the import bill for oil for India, which led to a deficit in Balance of Payments. There was a decline in workers remittances which increased the burden on India.

   

• India was a larger exporter to the USSR in the era of the 90s. But in 1991, because of the disintegration of the USSR India’s exports halted to a large extent.

   

• During the 90s, India had a fixed exchange rate at which the Indian rupee was pegged to the volume of a basket of currencies of major trading partners.

   

• In 1991 Indian PM Rajiv Gandhi was assassinated. There was political uncertainty. The Govt. was not stable. So in an uncertain political system, investors did not have confidence to invest.

 

Condition of Indian Economy:

• Fall in foreign reserves
• Rise in inflation
• Unfavorable Balance of payment
• Fall in exports
• Increase in external and internal debt

Main Economic Reforms in India:

1. Liberalization 2. Globalization 3. Privatization

Liberalization: Liberalization in the economy is a situation in which there are fewer restrictions by the government on trade and capital.

Globalization: Globalization means the interconnectedness between the residents of different nations through transport, the internet, and communication.

Privatization: It means when the ownership of a company or business lies with a private individual or group of individuals. In other words, there is no control over the company by the government.

What is the New Economic Policy of 1991?

In order to come out of 1991 Indian economic crisis, India needed money. So there was a bailout deal between India and the IMF. As a part of this deal, it was required for India to initiate economic reforms. On 24th July 1991 Finance Minister Manmohan Singh in his maiden Budget speech announced the new economic policy. P.V. Narasimha Rao and Manmohan Singh are known as the heroes of economic reforms.

 

The Features of New Economic Policy:

1. Delicensing: 

1. In this policy, the license system was abolished for all industries except 18 industries. In 2006, that number also decreased to 5 industries.

These industries were :

• Alcohol
• Cigarette
• Defence equipment
• Hazardous chemicals
• Industrial explosive

2) No registration:

There is no need for registration to open new industries. They just have to give an advertisement.

3) Contraction of public sector:

To increase the efficiency of the public sector, this policy reduced the number of public sectors from 17 to 8 in 1991. In 2010-11 this was further reduced to 2, that is,

• Railways
• Atomic energy

4) Foreign Investment:

This policy increased the limit on foreign direct investment from 40% to 51%. Automatic approval has been given to foreign companies which means there is no need to get Govt.permission.

5) Setting up of BIFR:

Under this policy,  the Board of Industrial And Financial Reconstruction has been established. The main objective to set up this board is to identify sick public sectors so that Govt. can make different schemes for these sectors.

6) Removal of MRTP Act:

In this policy Monopolies Restrictive And Trade Practices Act was abolished to give concessions to industries. In order to stop unfair trade practises in 2002, the Competition Act was formed.

7) Setting up of FEMA:

In 1999 Foreign Exchange Management Act was set up by Govt.

 

8) Freedom to import:

Entrepreneurs have been given permission to import heavy machines from foreign countries.

 

9) Loans to exporters:

A large amount of loans have been given to exporters at a very low rate of interest.

 

10) Setting up of FIPB:

In order to increase the flow of Foreign Capital Foreign Investment Promotion Board was set up. The main goal of this board is to attract foreign investment on a large scale.

 

The Advantages of New Economic Policy:

• The GDP growth of India increased.
• The level of production and exports also increased.
• This policy helped in the reduction of poverty, both urban and rural poverty.
• Efficiency of workers increased a lot. They have been given technical knowledge which in return has increased their productivity.
• The flow of capital investment also increased, which is shown in the following table:

Year                                                      Investment( in million $)

1991                                                      103

2008                                                    23,983

2011                                                      50,126

The Disadvantages of New Economic Policy:

• More privatization reduced the welfare of people.
• This policy destroyed domestic small industrialists as they failed to face cut-throat competition.
• Economic power was concentrated in the hands of a few private players. As a result inequalities have increased among people.
• Capital-intensive techniques were used which in return increased the level of unemployment.