Balance of Payment Crisis 1991

By : Neha Dhyani

Updated : Mar 30, 2022, 13:07

The Balance of Payment Crisis in India in 1991 was a critical economic situation faced by the country. The crisis emerged from a foreign exchange shortage that developed in 1990, but it ultimately came to a head in 1991. The deficit was caused by numerous external factors, including the first Gulf War and the political instability that followed it, and internal factors such as rampant government borrowing and spending on imports.

Balance of Payment Crisis - Overview

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.

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.

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The Outcome of the Balance of Payment Crisis

The BOP Crisis 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.

Soon 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 India in 1991 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 problem arose.

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FAQs on Balance of Payment [BOP] Crisis

Q.1) What external factors led to the Balance of Payments Crisis in 1991?

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

The 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 this are:

  • The First Gulf War (1990–91).
  • The escalation in oil prices.
  • The collapse of the Soviet Union, a significant trading partner of India.

Q.2) How did India respond to the Balance of Payments Crisis?

India responded to this 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.

Q.3) Which was the critical event that independent India faced in 1991?

The balance of payments crisis was a significant event faced by India in 1991.

Q.4) What were the causes of the Balance of Payments Crisis in 1991 in India?

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.