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Day 22 – Q 4.Examine the factors that led to the balance pf payment crisis of the early 90s. How did the political class handle this crisis? Explain.

4. Examine the factors that led to the balance pf payment crisis of the early 90s. How did the political class handle this crisis? Explain. 

उन कारकों की जांच करें जिनके कारण शुरुआती 90 के दशक के भुगतान संकट उत्पन्न हुआ था। राजनीतिक वर्ग ने इस संकट को कैसे हैंडल किया? विस्तार से बताएं।


A default on payments, which would have a disastrous consequence for the Indian economy, had become for the first time in our history a serious possibility in June 1991. This balance of payment crisis had its genesis in the policies of earlier governments and was ably handled by the then government at the centre, headed by P V Narsimha Rao and finance minister Manmohan Singh.


The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments, such as foreign aid and remittances. 

The following factors can be seen as responsible  for the balance of payment crisis in 1991:

  1. The first important factor responsible for this growing crisis in BOP was the policy of import liberalisation introduced by the Congress (I) Government headed by Late Rajiv Gandhi resulting in a huge inflow of imports particularly after the announcement of Exim Policy in 1985.
  2. The second factor responsible for the crisis was the existing heavy import base of the country. In-spite of attaining an encouraging 18.7 percent annual growth rate of exports during Seventh Plan, which was even higher than the annual growth rate of imports (16.8 per cent), the BOP position deteriorate to a serious point as the country started with larger volume imports.
  3. The third factor responsible for this BOP crisis is the higher import intensity in the industrial development resulting from import intensive industrialisation process followed in the country for meeting the requirements of elitist consumption (viz., colour TVs, VCRs, refrigerators, motor cycles, cars) etc.
  4. The steep depreciation of rupee with dollar and other currencies during 1987-91 had resulted in a considerable increase- in the value of imports.
  5. The worsening of the current account deficit in BOP in 1990-91 and therefore was partly on account of Gulf war and the higher price of petroleum imports and higher volume of petroleum imports continuously.
  6. The current account deficit in 1990-91 weakened the ability to finance deficit massively. Political uncertainty at home, copied with rising inflation and widening fiscal deficits, led to a loss of international confidence. This had resulted in drying up of commercial borrowing and an outflow of NRI deposits.

To tackle such a grave crisis, the government’s immediate response was to secure an emergency loan from the International Monetary Fund by pledging tons of India’s gold reserves as collateral security. Furthermore, the Narsimha Rao government brought wide ranging reforms which were collectively called LPG reforms (Liberalisation-Privatisation-Globalisation) and these formed part of the New Economic Policy (NEP). 

The thrust of the policies was towards creating a more competitive environment in the economy and removing the barriers to entry and growth of firms. This set of policies can broadly be classified into two groups: the stabilisation measures and the structural reform measures. 

Stabilisation measures are short term measures, intended to correct some of the weaknesses that have developed in the balance of payments and to bring inflation under control. In simple words, this means that there was a need to maintain sufficient foreign exchange reserves and keep the rising prices under control. On the other hand, structural reform policies are long-term measures, aimed at improving the efficiency of the economy and increasing its international competitiveness by removing the rigidities in various segments of the Indian economy.

The government initiated a variety of policies which fall under three heads viz., liberalisation, privatisation and globalisation. These can be seen as below:

  • Liberalisation- Liberalisation was introduced to put an end to restrictions and open up various sectors of the economy. Deregulation of Industrial sector, financial sector reforms, tax reforms, foriegn exchange reforms and trade and investment policy reform formed part of this measure.
  • Privatisation- It implies shedding of the ownership or management of a government owned enterprise. Privatisation of the public sector enterprises by selling off part of the equity of PSEs to the public is known as disinvestment.
  • Globalisation- Globalisation is the outcome of the policies of liberalisation and privatisation. It means an integration of the economy of the country with the world economy.


The crisis that erupted in the early 1990s was basically an outcome of the deep-rooted inequalities in Indian society and the economic reform policies further aggravated the inequalities. But the process of globalisation through liberalisation and privatisation policies has produced positive as well which has helped leapfrog economic development in India.

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