Exchange Rate Crisis in India : 1991
Lead-up to the 1991 Crisis
For the first part of the 1980's, Current Account Deficit stayed below 1 1/2 % of GDP. There was a substantial growth of petroleum production around this time and this led to savings in energy expenditures, thus keeping the current account deficit low. Also, the high proportion of concessional external financing kept the debt service down.
But, in the latter half of the decade, Current Account Deficits widened. Up until that time, India had focused on Import Substitution. Attempts were made to liberalise the economy in 1966 and 1985. The first attempt was reversed in 1967. Thereafter, a stronger version of socialism was adopted. The second major attempt was in 1985 by prime minister Rajiv Gandhi. The process came to a halt in 1987, though 1966 style reversal did not take place. But around that time, India started focussing on export led-growth, supported by measures to promote exports and liberalize imports for exporters. The government started liberalising trade, financial markets and investment. Export growth was rapid owing to initial measures of deregulation and competitiveness associated with real depreciation of the rupee. Even so, the value of imports increased faster; for example : Defence and aircraft capital equipment.
Current account deficits in the second half of the 80's exceeded the availability of aid financing on concessional terms and consequently other sources of financing were tapped to a greater extent. In particular, the growing current account deficits were increasingly financed by borrowing on commercial terms and remittances of non-resident workers - which meant greater dependence on higher cost short maturity financing and heightened sensitivity shifts in creditor confidence. India's external debt nearly doubled from about $35 billion the end of 1984/85 to about$69 billion by the end of 1990/91. Medium and long-term commercial debt jumped from $3 billion to $13...