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The 1991 Economic Crisis and Reforms

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Estimated time: 16 minutes
CBSE: Class 12

Background

  • Since independence, India followed a mixed economy approach.
  • Excessive government controls and regulations hampered economic growth over time.
  • This eventually led to a severe economic crisis by 1991.
CBSE: Class 12

The Crisis of June 1991

  • Fiscal deficit: 6.6% of GDP (1990–91)
  • Internal debt: ~50% of GDP
  • GNP growth: only 1.4%
  • Negative growth in agriculture, foodgrains, and industry
  • Inflation: 13–14%
  • Foreign trade contracted sharply
  • Rupee depreciated by 26.7%
  • Foreign exchange reserves dropped to less than 2 weeks of imports
  • NRIs began withdrawing funds from India
  • India's credit rating downgraded from AAA to BB+
  • India was close to defaulting on external obligations
CBSE: Class 12

Emergency Measure (Gold Pledge)

  • 20 tonnes of gold leased to the State Bank of India (SBI).
  • 47 tonnes of gold pledged to the Bank of England.
  • Amount raised: approximately $600 million.
CBSE: Class 12

Reform Measures Adopted

  • Fiscal correction steps introduced
  • New Industrial Policy announced; deregulation initiated
  • Most industries delicensed (compulsory licensing abolished)
  • MRTP Act amended
  • Public sector areas opened to private sector
  • Foreign equity limits raised
  • Foreign Investment Promotion Board (FIPB) established
  • Rupee devalued by ~18% in July 1991
  • Loans taken from IMF and World Bank
  • India Development Bond and immunity schemes launched to attract foreign funds
  • Pledged gold returned after initial crisis was resolved
  • Import controls and credit squeeze applied
  • Eximscrips introduced
  • LERMS (Liberalised Exchange Rate Management System) was implemented
  • Import licensing and advance licensing liberalised
CBSE: Class 12

New Industrial Policy — July 1991

Key features:

  • Reduction in compulsory licensing.
  • Deregulation of public sector industries.
  • Disinvestment initiated.
  • Liberalisation of foreign capital policies.
  • Permission for technology agreements.
  • Establishment of FIPB (Foreign Investment Promotion Board).
CBSE: Class 12

The Three Pillars - LPG Reforms

Pillar Full Form Meaning
L Liberalisation Removing licensing shackles on industry
P Privatisation Reducing the role of the public sector
G Globalisation Encouraging foreign participation in India's economy
CBSE: Class 12

Key Points: The 1991 Economic Crisis and Reforms

  • Post-independence excessive controls under the mixed economy model led to the 1991 crisis.
  • Fiscal deficit hit 6.6% of GDP, inflation 13–14%, and forex reserves fell below 2 weeks of imports.
  • Credit rating was downgraded from AAA to BB+, pushing India close to external default.
  • India pledged 47 tonnes of gold to the Bank of England, raising ~$600 million as an emergency measure.
  • New Industrial Policy (July 1991) delicensed most industries and established FIPB.
  • Rupee devalued by ~18%; LERMS introduced for exchange rate management.
  • Reforms launched the LPG framework — Liberalisation, Privatisation, and Globalisation.
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