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Crisis of 1991
- India faced the Balance of Payment crisis in 1991 due to a huge macroeconomic imbalance. Balance of Payment (BoP) Crisis is also called a currency crisis. It occurs when a nation is unable to pay for essential imports or service its external debt payments.
- The effects of the Balance of Payment Crisis are mentioned below.
- Imports were restricted.
- The price of fuels was raised.
- Bank rates were raised.
- Government had to cut its spending.
- India had to secure an emergency loan of $ 2.2 billion from the International Monetary Fund by pledging 67 tonnes of Gold as collateral security.
- In May 1991, India sent 20 tonnes of Gold to the Union Bank of Switzerland, Zurich and in July, 47 tonnes of Gold was given to Bank of England to raise a total of $ 600 million.
- India was forced to get financial help from IMF and World Bank.
- To manage the economic crisis of 1991, Indian Government approached the International Bank for Reconstruction and Development (IBRD), popularly known as World Bank and the International Monetary Fund (IMF) and received $ 7 billion as a loan.
- For availing of the loan, these international agencies expected India to liberalize and open up the economy by:
- Removing restrictions on the private sector;
- Reducing the role of the government in many areas, and
- Removing trade restrictions.
India agreed to the conditions of World Bank and IMF and announced the New Economic Policy.
