1991 India Economic Crisis - Recovery

Recovery

Further information: Economic liberalisation in India

With India’s foreign exchange reserves at $1.2 billion in January 1991 and depleted by half by June, barely enough to last for roughly 3 weeks of essential imports, India was only weeks way from defaulting on its external balance of payment obligations.

The caretaker government in India headed by Prime Minister Chandra Sekhar's, immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral. The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million. National sentiments were outraged and there was public outcry when it was learned that the government had pledged the country's entire gold reserves against the loan. Interestingly, it was later revealed that the van transporting the gold to the airport broke down on route and panic followed. A chartered plane ferried the precious cargo to London between 21 May and 31 May 1991, jolting the country out of an economic slumber. The Chandra Shekhar government had collapsed a few months after having authorized the airlift. The move helped tide over the balance of payment crisis and kick-started Manmohan Singh’s economic reform process.

P.V. Narasimha Rao took over as Prime Minister in June, the crisis forcing him to rope in Manmohan Singh as Finance Minister, who unshackled what was then called the 'caged tiger'. The Narasimha Rao government ushered in several reforms that are collectively termed as liberalisation in the Indian media. Although, most of these reforms came because IMF required those reforms as a condition for loaning money to India in order to overcome the crisis. There were significant opposition to such reforms, suggesting they are an "interference with India's autonomy". Then Prime Minister Rao's speech a week after he took office highlighted the necessity for reforms, as New York Times reported, "Mr. Rao, who was sworn in as Prime Minister last week, has already sent a signal to the nation -- as well as the I.M.F. -- that India faced no "soft options" and must open the door to foreign investment, reduce red tape that often cripples initiative and streamline industrial policy. Mr. Rao made his comments in a speech to the nation Saturday night." The forex reserves started picking up with the onset of the liberalisation policies and peaked to $314.61 billion at the end of May 2008.