What exactly happened to the Indian economy in 1991 in layman's terms?

By On Monday, October 10th, 2016 Categories : Question & Answer

What exactly happened to the Indian economy in 1991 in layman's terms?. Do You mam & sir own that kind of query?, If do then plz get the best answer right after this line:

1. Most countries in the world depend on the global economy for a wide variety of things. For India, we depend on West Asia for our oil, South Africa for our gold, US for our technology, South east Asia for vegetable oil etc. To buy these items from the world market, we need US dollars – the global currency of trade. The only way to earn dollars is by selling enough of our stuff in the global economy (exports).

Since 1960s, India depended on the Soviet Union for our exports – as we failed to develop good economic relationships with the US and Western Europe. It was a good going for a while (India and the Soviets) until the proverbial sh*t started to hit the fan. In late 1980s, Soviet Union started to crack and by 1991 they were split into 15 nations (Russia, Kazakhstan, Ukraine, etc). Now, India had a major problem because our primary buyer was in turmoil. Exports were down significantly. Dissolution of the Soviet Union

2. Meanwhile, there was this guy Saddam Hussein who had his misadventure into Kuwait in 1990. This led US to war with Iraq in early 1991. Oil fields started to burn and ships found it hard to reach Persian gulf. Iraq and Kuwait were our big suppliers of oil. The war led to destruction of our oil imports and the prices shot up substantially – doubling in a few months. Gulf War and 1990 oil price shock.

3. In the late 1980s India’s political system was imploding. Prime Minister Rajiv Gandhi was involved in a series of troubles – Bofors scandal, IPKF misadventure, Shah Bano case that eventually led to his ousting in 1989. What followed were two more terrible leaders who were as unstable as they were incompetent. This had a huge effect on Indian economy that was totally forgotten in the political crisis. in 1991 this stop-gap government crashed. Until Narasimha Rao was sworn as Prime Minister in 1991, Indian economy was left in gross neglect.

Thus, 1991 was the year of perfect storm. This triple crisis brought India on its knees. On the one end, our primary buyer is gone. On the other hand, our primary sellers were in war. In the middle, our production was effectively stopped by political crisis. We were running out of dollars to buy essential items like crude oil and food from the rest of the world. This is termed a “Balance of Payments Crisis” – meaning India was not able to balance its accounts – exports were significantly less than imports.

Since, we didn’t have many dollars, we went and begged the IMF – the pawn shop of the world. They asked us to pledge our gold reserves in return for the interim loan of $3.9 billion (a huge sum for India then) just as the neighborhood moneylenders ask for our gold when we want an emergency loan. We took 67 tons of our gold in two planes – one to London and other to Switzerland to get this assistance. India’s story of the crisis

‘A fiscal stimulus is needed’

India had to physically  move the gold stock out of India, abroad. I’m informed, by very, very  reliable sources, that the van taking the gold to the airport broke  down, and there was total panic.


India began its “liberalization” when Rao became our Prime Minister on 21st June 1991. Essentially it was the undoing some of the idiotic policies that Nehru and his family put in place in our country (sorry, can’t resist a dig at Nehru). Licence Raj

  1. We did away with many of the import restrictions. Until 1991, we imposed a 400% customs duty on many products. Industries had to beg to get an essential ingredient imported. By 1991, the duties on many products were reduced substantially. This brought new growth in our industries.
  2. Import licensing was abolished. Until 1991, you need a license to import anything and this license was very hard to get.
  3. Government did away with the production licensing in many industries. Until 1991, you needed government’s permission in what to produce and how much to produce. In one stroke, the restriction was removed in many industries.
  4. Rao put domestic economic back on track with two stars – Montek Singh and Manmohan Singh. Huge spur was given to our local industries. Stock market rules were relaxed.
  5. Manmohan abolished “gold smuggling” (remember 1980s Bollywood movies?) in one go. He effectively allowed Indian expats to bring back 5 kilos of gold with them with no duty. Now, nobody had a reason to smuggle gold & electronics.
  6. Singh and Rao allowed foreign investors to come. Until then India was living in the paranoia of East India company. Many sectors were opened for foreign investment and collaboration. Now, companies like Coke and Nike could come in. Suddenly, Bombay Stock Exchange found a life.
  7. Government started selling some of its businesses to the private. This brought cash and new round of efficiency.

In short, liberalization in India’s context meant a return of the common sense that was hard to find in our economic circles since 1947. We just removed some of the rules. there is still a long way to go.



  Economic liberalisation in India

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