How India Tackle Its Worst Bop Crisis In 1991:

How India Tackle Its Worst BOP Crisis In 1991:

How ManMohan Singh and Narasimha Rao saved India in 1991 and changed history 30 years ago, when India was going through its worst economic crisis, sevesl reforms were implemented. Here is a look at the causes of the crisis and India's response to it. 

New Delhi:

On July 24, 1991, just one month after being inducted into the P.V. Narasimha Rao government, finance minister Manmohan Singh delivered his first budget. The administration also presented a revolutionary new industrial policy that removes several barriers to industry growth. However, Rao and Singh's entry into the administration was a trial by fire for both of them. In the early weeks after taking office, no other government faced decisions that were as politically challenging as theirs.
This historic occurrence, which saved India from a serious economic crisis and put the country on a high growth trajectory, occurred exactly 30 years ago. Let’s look at how the issue came about and how India handled it. 
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What Was The Crises That Existed In 1991?

India experienced its worst economic downturn and was on the verge of a sovereign default in 1991. Oil prices had skyrocketed as a result of the 1990–1991 Gulf War, and remittances from Indian expatriates had decreased. India's foreign exchange reserves were severely depleted as a result, at less than $6 billion, they were barely sufficient to cover about two weeks' worth of imports. 
The government was also not helped by the worsening fiscal deficit situation and rising levels of foreign debt. The government's problems were further exacerbated by a fiscal deficit of 8% of GDP and a current account deficit of 2.5% of GDP. Double-digit inflation rates also increased the burden on the average person. 

Immediate Crisis-Reduction Measures

Preventing a sovereign default, an ignominy that India has so far managed to avoid—was the Rao government's top concern. There were two quick actions taken:

How India Tackle Its Worst Bop Crisis In 1991

1. Devaluation of the rupee:

On July 1, 1991, the government and Reserve Bank of India (RBI) began a two-step devaluation of the rupee. The first devaluation was around 9% versus major currencies, and the second was about 11% two days later. To increase the competitiveness of Indian exports, this was done.
In order to make the devaluation more acceptable to all stakeholders, Rao, who is renowned for his political sagery, opted to implement it in two phases. 

2. Gold holdings pledged to strengthen foreign exchange reserves:

From July 4 through 18, 1991, the central bank of India pledged its gold holdings with the Bank of England in four instalments, raising almost $400 million.
In order to raise about $200 million prior to this, on May 16, the State Bank of India sold 20 tons of gold to the Union Bank of Switzerland, or UBS.
The government had previously received emergency loans in two tranches totaling about $2 billion from the International Monetary Fund. 

Structural Alterations

•    Trade policy:

The Indian government unveiled a new trade strategy that aimed to alter the licensing procedure as part of its efforts to increase exports. In order to prevent non-essential imports, it also tied exports to imports.
•    The government eliminated export subsidies in order to account for the increase in exports brought on by the significant devaluation of the rupee. It established the idea of issuing exporters tradable Exim scrip for their own use or for sale. These scrip’s were calculated using the export value. 
•    Additionally, the programme eliminated the necessity for imports to be routed through state-owned businesses. It was permitted for the private sector to import things on its own. 

•    New industrial strategy:

On the eve of the 1991 Budget, the ground-breaking new industrial policy was presented. By abandoning a license raj system, it recommended several significant changes in how India regarded its businesses and international investment.
•    In order to make it simpler for businesses to start up and restructure themselves through mergers and amalgamations, the policy loosened some of the requirements in the Monopolies and Restrictive Trade Practices Act. The programme stated a policy of automatic clearance for foreign direct investment up to 51% as opposed to the former cap of 40% for foreign equity investments, ending the public sector monopoly in several areas. 
•    Only a small number of areas that were significant from the standpoint of national security were subject to public sector monopolies. In addition, it did away with industrial license for all businesses save those with a minimum investment of 18.
•    All of these adjustments made it simpler to conduct business in India, and in the years that followed, the Indian market was flooded with foreign investments and goods.
•    Budget 1991–92: Manmohan Singh presented the budget on July 24. The budget was a continuation of the reform initiatives the Indian government had been carrying out in recent weeks. Some challenging actions were taken. As a result of the budget's efforts to address the growing fiscal imbalance, corporation tax rates were raised by 5 percentage points to 45 percent, and the idea of tax deducted at source was implemented for various financial activities, such as bank deposits.
•    Additionally, it eliminated the sugar subsidy and raised the cost of gasoline, fertilizers, and cooking gas cylinders.
•    It loosened regulations for non-resident investment and opened mutual funds to the private sector.
•    There was also a plan launched for people to declare unexplained money. People received protection from prosecution, the imposition of interest, and punishment.
•    After the budget, the government announced numerous initiatives to maintain the momentum of the reforms and rescue India from its crisis over the course of the following eight months. 
•    After the budget, the administration announced numerous initiatives to maintain the momentum of the reforms and rescue India from its crisis over the course of the following eight months. 
•    A second trade policy package to increase exports and a package for growing small businesses were among them.
•    A group headed by former RBI governor M. Narasimham was also established by the government to recommend banking sector changes. 
•    The formation of a second committee to make recommendations for tax reforms, led by renowned public finance expert Raja Chelliah, came next.

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