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Briefly discuss the Balance of Payment Crisis and the measures that led to overcome it in the 1990’s.
Introduction:
During the year 1991, India faced a huge economic problem in the way of ‘Balance of Payment Crisis’. This is also called as currency crisis. In simple terms, when a country does not have money to buy the imports, then it is said to be balance of payment crisis.
Body:
Causes of BOP in 1991:
- Imports were greater than exports.
- Current account deficits were high
- Lack of forex reserves, which could have lasted for only 3 weeks
- Investors withdrew their money from Indian markets
- Steep rise in inflation rates
- High Fiscal deficit
- High rise in the internal debts
- ‘License Raj’ system had prevailed in the country which was the root cause of all these.
Effects:
- Restirction on imports
- Hike in fuel prices
- Bank rates were revised
- A cut was essential on infrastructural projects
Reforms that solved the problem:
- Abolition of Industrial licensing
- Rupee was devalued
- Liberalization, Privatization & Globalization were introduced for the first time
- Public Sector companies were revamped
- Export subsidies were withdrawn
- Domestic supply was promoted
Conclusion:
Due to these reforms, Indian economy started to improve. Now India’s forex reserves have increased multi-fold. Right now it stands at $600 billions which was only $1.2 billion during 1991 crisis. Gloabally India is positined at 4th place in forex reserves after China, Japan & Switzerland. The recent surge in the reserves can be credited to the substantial rise in the foreign direct investments.
