Indian economic crisis

Résumé du document

The roots of the 1991 currency crisis in India can be seen during the entire decades that precede it. As a matter of fact it lies in the large and persistent macroeconomic imbalances that developed over the 1980s. A close examination of the government expenditures, over the 1980s, suggests that the cause of the crisis was due to the large and growing fiscal imbalance.

This imbalance finally leads to a large fiscal deficit resulting from an increase of the government expenditures. It finally resulted to a balance of payment crisis. Thanks to Manmohan Singh, the actual Prime minister in India who was the Finance minister at that time, the country managed to successfully take off again through a reform of the economical system. This led us to the following question: How did the 1991 crisis change the economical Policy of India?

I will try to answer to this question by first focusing on the causes of the crisis, we will see that it was caused by India's own government policy as well as international conjuncture and in a second time we try to understand how did the government react and what Policy did they apply.

Extraits

[...] The main aim being to secure and have a stock of foreign currency. As a result the balance of payment came back to equilibrium, the debt was paid back (all in the short run and most of it on the long run debt). It was a good solution as no government bond was issued and thus it does not have long run consequences. The negative aspect of this was that the Indian government had no more gold in federal reserves: one time solution only! [...]

[...] Only nonresidents Indian, member of the Diaspora, were allowed and could invest as much as they wanted in India. Therefore there was limited amount of foreign currencies entering in India. As the policy was protectionism prices were kept higher. At the same time exports keep the value of the currency fairly high, thanks to the law of supply and demand theory, because in a way to buy Indian goods people and companies ere obliged to buy rupees. Another important factor that generates the crisis is an import-oriented growth. [...]

[...] Right after independence India started its economic growth, but development and economic growth requires energy therefore India increased its oil imports by 40% between 1987 and 1990. Another important effect that played an important role in the forthcoming of the crisis was a sudden deregulation of the market due to the sudden opening of the market to foreign companies at the beginning of the 1990's. India being a developing economy, a catch up effect took place immediately generating a high growth on the short run but in the long run it stabilizes. [...]

[...] A close examination of the government expenditures, over the 1980s, suggests that the cause of the crisis was due to the large and growing fiscal imbalance. This imbalance finally leads to a large fiscal deficit resulting from an increase of the government expenditures. It finally resulted to a balance of payment crisis. Thanks to Manmohan Singh, the actual Prime minister in India who was the Finance minister at that time, the country managed to successfully take off again through a reform of the economical system. This led us to the following question: How did the 1991 crisis change the economical Policy of India? [...]

[...] GDP growth reached and exceeded 7%. Another example was the real fixed investment that rose almost by 40% between 1993-94 and 1995-96. This was possible thanks to more than 50% of increase in industrial investment as well as private one. The consequences for India were that the FDI heavily increase, higher growth rate in average between 1990 and 1995), increase in confidence and regulation of the banking system helped saving to increase (more and more poor people have bank accounts when they can increasing loanable funds). [...]