Today, India is the 5th largest economy in the world with a GDP of approximately $3 trillion, but there was a time when the economy was about to collapse and we had money only for about 2 weeks of food. This was the 1991 Indian economic crisis caused due to trade deficit. To understand the crisis, we will have to start from the 1950s right after India became independent.
In the 1950s, the Indian Government decided to set a stage where Indian companies to develop without any resistance. They discouraged foreign trade by putting high tariffs which were as high as 120%. The government believe Indian companies will not be able to compete with foreign goods since they were young so we believed in domestic production that is goods should be made in India by Indians. We still needed to import food, oil and other necessities though to feed the entire country. In the 1980s the government was working in deficit that is we were spending more and earning less. Due to the Gulf war, the oil prices had increased and exports were decreasing. Our credit dried up and investors losing confidence pulled out their money. By 1990-1991, we were taking loans to pay for loans with the internal debt increased to about 53% of the GDP.
In 1991 January, our foreign exchange reserves were about $1.2 billion which were almost depleted by June. The Indian government only had ECONOMIC CRISIS money to pay for 2 weeks’ worth of food, to get money, in may the Chandrashekar government under the advice of the RBI Governor, mortgaged 67 tons of gold (almost all of the reserves) to the Bank of England and Bank of Switzerland raising $600 million. The airlifting of the gold was done in secret as in June, the general elections were going to occur and the public would have been outraged if they found about the gold. They did find out and the Chandrashekhar government was heavily criticized. In June, the Narasimha Rao government took over and he appointed Manmohan Singh as the finance minister.
To repair the economy, Manmohan Singh introduced the concepts of Liberalization, Privatization and Globalization. Basically, tariffs were lowered so foreign goods could compete in the Indian market and companies from other countries could invest in the Indian market. Trade was made free and the ECONOMIC CRISIS Private sector which earlier could not enter 17 Industries could now enter all except 3. There was a sharp decline in the value of rupee, something that was necessary for the economy to survive. These are the reforms that allowed India’s GDP to rise from $266 billion in 1991 to $3 trillion today. If not for the decisions and reforms introduced that year of 1991, India’s economy could never be able to compete with giants like Germany, UK, USA and Japan.