1991 Indian Economic Crisis and Reforms v4

8/12/2019 1991 Indian Economic Crisis and Reforms v4

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1991 INDIAN ECONOMIC CRISIS

AND REFORMS

Asian EconomiesGMA 2014

Group 4 : Camilia Berrada, Alice Gay, Hicham El Azani, Aurle

Gouy

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4-AsianEconomies


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INDEX

1. Pre-crisis context

2. Crisis outlines3. IMF plan and conditions

4. Reforms and consequences

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1. PRE-CRISIS CONTEXTNERHUS DEVELOPMENT POLICY (50S)

Nehrus vision for Independent India was to be self-sufficient, toavoid depending on occidental capitals.

Nehru was influenced by socialism and especially in Soviet Union.He instaured Five Years plans and allowed all industries in India to

be potentially nationalized.

India would thus follow a development strategy by substitution ofimportations , based on 4 pillars: Central planification focused on industry

Large public sector

Robust custom barriers Licence raj authorization system

The Licence raj administration authorizations aimed at controling theprivate sector production capacity (in volume and in terms ofdiversification).

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1. PRE-CRISIS CONTEXTNERHUS DEVELOPMENT POLICY (50S)

This inward-looking and highly interventionist development strategywould protect Indian economy from international competition, whichhad several consequences :

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Indian exportsshare in theglobaleconomy goesfrom 1,9% in

1950 to 0,6%in 1973


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1. PRE-CRISIS CONTEXTMODERNISATION FINANCED BY LOANS (80S)

However, Indian economy is not sustainable without some vitalimportations such as energy. In order to pay for those importations,India needs to sell to foreign countries.

Thus, the 80s is a decade of slow economic opening to the globaleconomy, under the governance of Rajiv Gandhi.

The persistent defiance of Indian government towards multinationals,which are seen as a symbol of occidental imperialism, leads to afinancing of modernization with loans.

The growing dependence on energy importations worsened thesituation (petroleum imports increased by 40% from 1986/87 to

1989/90).

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Indias external debts almost doubled from $31 million in1984/85 to $69 million by the end of 1990/91


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1. PRE-CRISIS CONTEXTHIGH SENSIVITY TO EXTERNAL SHOCKS (1989-90)

The current account deficit was deepening, and was increasinglyfinanced by borrowing on commercial terms and remittances ofnonresident workers.

This lead to a high vulnerability to external shock in 1990/91, whichwould further cause the largest crisis Independent India ever

encountered.

Two external shocks would deepen the current account deficit :

Events in the Middle-East in 1990 leading to the surge of world oil prices

Slow growth in important trading partners : when US was the largest export

destination for India, its growth slowed down from 3,9% in 1988 to 0,8% in1990 and to -1% in 1991.

Rising political uncertainty in India also weakened the economy.Castes and religion disputes broke out and riots spread throughoutthe country.

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2. CRISIS OUTLINESCRISIS BREAKDOWN

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A classic external payments crisis...

i. High fiscal and current account deficits

ii. External borrowing to finance the deficits

iii. Rising debt service obligations

iv. Rising inflation, and inadequate exchangerate adjustment

Due to a Foreign Exchange crisis

In 1991, foreign trade shrunk imports falling by19.4% and exports by 1.5%. Rupee depreciatedby 26.7% against US dollars.

External debt reached $83 billion in March 1991,

45% of which was contracted from privatecreditors and at variable interest rates

Political Instability 1/2

$2 billion was borrowed each day by the last

government to avert a default

National Front coalition faced a nationwidecrisis. Government collapsed when the BJPpulled out.

New minority government failed to pass thescheduled budget in February 1991

Political Instability 2/2

In May 1991, while campaigning for the general

elections, former prime minister Rajiv Gandhiwas assassinated

In June 1991, Congresss political mandarinschose Narasimha Rao to become Indias newprime minister

Rao chose Manmohan Singh as his partner


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2. CRISIS OUTLINESMODELISATIONS

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And a fiscal crisis

There was a serious fiscal crisis in which fiscaldeficit reached the level of 6.6% of GDP

Internal debts rose to about 50% of GDP withinterest payments draining about 39% of total

revenue collections of central government

GNP growth rate fell to 1.4% from the peak levelof 10.5% in 1988-99

Negative growth rate

i. Agricultural promotion: -2.8%ii. Food Grain production: -5.3%iii. Industrial production: -0.1%

Inflation Rate based both on WPI and CPI

soared high at 13-14%

Emergency situation

In June 1991, the Indian Treasury only has 4

weeks of importations in value in reserve

Indian state almost goes bankrupt

This has been perceived has a nationalhumiliation by the Indian government

India considered a few options

i. Temptation to default

ii. Seeking private fundsiii. To pawn gold

IMF


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3. IMF PLAN AND CONDITIONSSITUATION

1991: India was only weeks way from defaulting on itsexternal balance of payment obligations Indias foreign exchange reserves = $1.2 billion in

January 1991 It depleted by half by June India's foreign debt = $72 billion (world's third

largest debtor after Brazil and Mexico)

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3. IMF PLAN AND CONDITIONSRESPONSE

The newly elected Indian Government sought forurgent aid: the biggest loan the I.M.F. has ever madeto India of $2.2 billion by pledging 67 tons of India'sgold reserves as collateral

Set ofconditionsrequired by IMF Demanding that India reduce its budget deficit Open its market to foreign competition Diminish its maze of licensing requirements

Cut subsidies, and liberalize investment

Anger of people reforms are considered as an"interference with India's autonomy" and would lead toreductions of food and fertilizer subsidies 13



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3. IMF PLAN AND CONDITIONSREACTION & CONSEQUENCES

Anger of peoplereforms are considered as an"interference with India's autonomy" and would lead toreductions of food and fertilizer subsidies

Unavoidable reforms: India had to open the door to foreigninvestment, reduce red tape and rationalize its industrialPolicy

Recovery: The forex reserves started picking up thanks to

liberalisation policies (it reched $314.61 billion at the end ofMay 2008)

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4. REFORMS AND CONSEQUENCESREFORMS FOR A CHANGE OF MODEL

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Industrial Liberalization

Abolition of industrial licensing (1991 industrialpolicy)

Restrictions removed on private expansions(scraping MRTP)

Opening the economy to FDI and foreign tech(creation of the Foreign investment Promotionboard, automatic approval for up to 51 % foreignequity in high investment priority sectors (capitalgoods, services, food processing)

Trade Liberalization

Elimination of import licensing

Rationalization of tariff structures (reduction ofmaximum duty on all goods from 110 % to 25 %in ten years)

Decanalisation of imports and exports : 16export items and 20 import items

Adoption of flexible exchange rate

Financial Sector Liberalization

Banking sector : public banks can have up to

49 % of private capital, removal of mandatoryconvertibility clause

Capital Market

Insurance

FiscalSector Liberalization


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4. REFORMS AND CONSEQUENCESCONSEQUENCES

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Industrial Liberalization Trade Liberalization

Financial Sector Liberalization FiscalSector Liberalization


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4. REFORMS AND CONSEQUENCESCONSEQUENCES: 2013 DEPRECIATION

xxx

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THANK

YOU

FOR

YOUR

ATT

ENTION

DO YOUHAVE ANY

QUESTIONS?

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BIBLIOGRAPHY

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IMF Working paper : Whatcaused the 1991 currency crisisin India , by Valerie Cerra and

Sweta Chaman Saxena, Oct. 2000

Inde: la roupie chute, lacroissance ralentit , inLexpansion.com, Aug 2013

LInde rtive au libralismetotal , by Christophe Jaffrelot, Jan2004 in Le Monde Diplomatique

English articles and reports French articles and reports

Documents

1991 Indian Economic Crisis and Reforms v4