BOP Crisis - Meaning, Outcomes of 1991 Economic Crisis

By Shivank Goel|Updated : October 12th, 2022

The BOP Crisis is commonly referred to as the Currency Crisis. It can be defined as the total amount of money that is flowing into a nation in a given period and, simultaneously, the money that is flowing out to the rest of the whole world. BOP crisis expands for Balance Of Payment Crisis. Due to the imbalance in the economy in huge amounts, India faced a BOP crisis in 1991. In 1985, the country's economy worsened as the imports started increasing. It left the country with twin deficits, i.e., the Indian government was running a large amount of fiscal deficit, and at the same time, the Indian trade balance was in deficit.

It is widely believed that India's Balance of Payments crisis (BOP crisis) in 1991 was caused by an unsustainable growth rate, excessive public sector deficits, and heavily controlled capital account that led to foreign exchange reserves drying up and ultimately forced India to go to the IMF for a bailout package. In this article, you will get to know all the necessary information regarding the BOP crisis in India in 1991.

Table of Content

What Is BOP Crisis?

The statement that files all the legal transactions between the government anatomies, entities, or individuals of one country to another is known as the balance of payment.

The main reason behind the BOP crisis is that it occurs when a particular country is unable to pay for essential imports or the services of its external debit payments. For a particular country, the balance of payment determines or specifies whether the country has a shortage or excess of funds. Hence, it automatically becomes a significant statement for the country.

Reasons For the Balance Of Payment Crisis In India

The balance of Payment Crisis hit India in 1991. It occurred due to the imbalance in the economy of the country. The imports increased dramatically. India was importing more goods than it was exporting. This caused massive inflation. The following points below analyze the reasons and causes for the balance of payment crisis in 1991 in India.

  • The Government of India exceeded the earnings of the expenditure. This increased the fiscal deficit. In 1980-81, the gross fiscal deficit was 9% which increased to 12.7 % of GDP in 1990-91. This also increased the government's internal debts. The GDP increased by 18 % from 1985-86 to 1990-91 ( 35 % to 53 % ).
  • During this period, the country was importing more goods than it was exporting. Hence, the current account deficit became large. The increase in the current account deficit was caused by the increase in the rate of crude oil that was the result of the Gulf War. Despite significant borrowing from the IMF ( International Monetary Fund ), forex reserves in India were severely depleted.
  • By the time ( June 1991 ), India had less than 1 billion dollars in foreign exchange reserves. This was not enough to cover the imports for three weeks. It made India insufficient to conduct international trade and it was about to default on its international debt obligations. Furthermore, the investors withdrew their funds. Lack of assurance made them withdraw their funds.
  • The inflation rates touched the sky, it increased dramatically. The short-term credit dried up too, as the exporters feared that they wouldn't be paid.

Measures Taken by Government to Overcome Balance of Payment Crisis 1991

The Government took certain special measures and steps to overcome the BOP crisis in India. They were: Monetary measures, reforms in the industrial policy, and reforms in the trade policy.

Monetary Measures

  • The rupee was devalued in 1991. The new government's first decisive step concerned the exchange rate.
  • The Reserve Bank of India shipped approximately 47 tonnes of gold to the Bank of England. It was collateral that would help India to obtain foreign currency from Japan and England.
  • Simultaneously, the RBI ( Reserve Bank of India ) sold around 20 tonnes of gold to a Swiss bank to obtain foreign currency. However, this was done under a condition i.e. the gold would be repurchased after six months.
  • The government compressed the imports using various monetary methods. This took a certain amount of pressure from foreign exchange.

Reforms in Trade Policy

  • There were specific reforms made in the public sector.
  • The control on the export laws and licensing was loosened.
  • The value of the rupee was devalued by 20 % to make the exports more competitive.

Reforms in Industrial Policy

  • Both the License Raj and Inspector Raj were removed.
  • The Industrial Licensing Act was also repealed.
  • To encourage investment, certain steps were taken.
  • Similarly, to alleviate the domestic supply constraints, reforms were taken.

Outcome Of BOP Crisis

The BOP Crisis in 1991 came about due to the failure of the Indian Government to manage the balance between imports and exports. India had been facing a BOP crisis since the mid-1980s. However, it was not until the late 1980s that the situation worsened. The Government had to stabilize the economy and prevent a major breakdown.

  • Due to this, there were two significant devaluations of the Rupee in 1992 and 1993. The Rupee was devalued by 40% in 1992 and 20% in 1993. The balance of payments crisis in India in 1991 was caused by the country's foreign exchange reserves falling to a level where the Government could no longer service its external debt.
  • India's foreign exchange reserves fell below the critical level, and it became impossible for India to finance its trade deficit. In addition, political instability and poor governance added fuel to the fire. The economic reforms initiated by Rajiv Gandhi failed miserably because there was no political consensus on these reforms.

The Balance of Payment Crisis in 1991 in India is one of the leading causes of the current economic crisis. Financial discipline and economic prudence were already the two critical issues for the Indian economy before the balance of payment crisis arose.

BOP Crisis UPSC Notes

The balance of payment crisis is an important topic for the UPSC Prelims and Mains Examination. To prepare and be well versed in the topic, candidates can take the help of the recommended books and study notes. Candidates can take a look at the UPSC Previous Year Question Papers to find out the types of questions asked on this topic. Prepare comprehensively for the BOP crisis topic to be able to solve the questions in the exam with ease.

BOP Crisis UPSC Sample Questions

This is an integral and essential part of the UPSC syllabus. Practice the BOP crisis UPSC sample questions as provided here to get on the way of accomplishing the desired result. The 1991 economic crisis questions of this pattern can be expected in the prelims and UPSC mains exam pattern.

1. Balance of Payments is an accounting statement that records monetary transactions between ________.

    1. Residents of a nation and non-residents
    2. Non-residents and the rest of the world
    3. Residents of a nation and the rest of the world
    4. None of the above

Answer: c ( residents of a nation and the rest of the world ).

2. Balance of Payments uses the _________ system of accounting.

  1. Single-entry
  2. Cash Basis
  3. Double-entry
  4. Accrual basis

Answer: c ( double-entry)

3. The 'resident', whose monetary transactions get recorded under the Balance of Payments system, includes which of the following?

  1. Government agencies
  2. Firms
  3. Individuals
  4. All of the above

Answer: d

Important Notes for UPSC
Poona Pact 1932Doctrine Of Eclipse In Indian Constitution
Classical Languages of IndiaAhmadiyya Movement
Classical Dance of IndiaTypes of Mountains

Comments

write a comment

FAQs on BOP Crisis

  • A balance of Payment Crisis [BOP Crisis] is the total amount of money that is flowing into a nation in a given period, and simultaneously, the money is flowing out to the rest of the world. It is also commonly known as the Currency Crisis.

  • A balance of Payment Surplus signifies that a particular nation exports more than it imports. In simple terms, it is the difference between the inflow and outflow exchange. It helps in boosting the economy of a country over a short period.

  • The Balance of Payment Crisis was triggered due to balance of payment problems after a series of external shocks.

    The BOP crisis triggered a sudden stop in capital flows, which started in the second half of 1990 and continued till mid-1991. External factors that led to the BOP crisis are:

    • The First Gulf War (1990–91).
    • The escalation in oil prices.
    • The collapse of the Soviet Union, a significant trading partner of India.
  • India responded to the BOP crisis by increasing its exports and decreasing its imports. But this measure could not help much as a large portion of Indian imports were essential items such as oil, food grains, machinery parts, etc.

  • The year 1991 was a turning point in the history of India. It marked the beginning of a new era in which the country was compelled to open up its economy and thereby expose itself to the winds of world trade, investment, and competition. The onset of the crisis has been mainly attributed to the Persian Gulf Crisis following Iraq's invasion of Kuwait. The balance of payments crisis was a significant event faced by India in 1991. The surge in inflation caused the balance of payment crisis.

  • It is widely believed that India's Balance of Payments (BOP) crisis in 1991 was caused by an unsustainable growth rate, excessive public sector deficits and heavily controlled capital account that led to foreign exchange reserves drying up and ultimately forced India to go to the IMF for a bailout package.

  • There are three components of the Balance of Payment. They are the Current Account, Financial Account, and Capital Account. 

    • Financial Account: The measurement of an increase or decrease in the international ownership of assets is known as a financial account.
    • Capital Account: It records all the international purchases and sales of assets such as stocks, bonds, and money.
    • Current Account: The record of international transactions that do not create any kind of liabilities is known as the current account.
  • The difference that is determined by the imports and exports of a country is known as the balance of trade. On the other hand, the difference between the inflow and outflow exchange is the balance of surplus. The net effect of the balance of trade is always zero. The net effect of the balance of surplus can be negative, positive, or zero.

  • The government took certain special measures and steps to overcome the 1991 economic crisis. They were: monetary measures, reforms in the industrial policy, and reforms in the trade policy.

  • The difference that is determined by the imports and exports of a country is known as the balance of trade. Whereas the balance of payment is the statement that files all the legal transactions between the government anatomies, entities, or individuals of one country to another is known as the balance of payment. India faced a balance of payment crisis in 1991.

  • Fuel prices surged after the economic crisis in 1991. India had also requested loans from the International Monetary Fund. The spending of the Government was trimmed off. The bank rate was also increased at the time of the Balance of Payment crisis. The competition surged for specific domains such as banking. This made more choices for the customers.

  • The high levels of fiscal deficit were the major reason for the balance of payment crisis in 1991. It surged the levels of debt. The currency crisis is also used to refer to the economic crisis. It occurs when the nation fails to pay back debt. The value of the currency steps down in the country where the economic crisis has occurred.

Follow us for latest updates